Top 3 Debt Metrics for Indian Businesses

In Part 1 of our series on good vs bad business debt, we explored real-world examples to differentiate between debt that fuels growth and debt that becomes a financial burden. We saw even highly rated companies stumble under the weight of excessive or poorly managed debt.

Now, let's dive deeper into the world of business debt management. This continuing series goes deeper into the concept of debt, explaining how companies use debt financing, the tax benefits associated with it, and the importance of analyzing past debt ratios. It also highlights the varying debt levels across different industries. This information complements the core financial metrics by providing a broader context for debt management strategies.

Let’s start with the basics: why do businesses take debt?

Growing your business takes cash, and there are two main ways to get it: selling slivers of ownership (equity financing) or borrowing money (debt financing).

Why Do Businesses Take Debt??

Each has its own perks and downsides, and the best choice depends on where your company is at in its journey.? Imagine it like life stages: young companies might choose equity financing to avoid giving up a piece of the pie too early. But debt financing can be a good option too, especially because it offers some sweet tax benefits.

Here's the trick with debt: the interest you pay on your loan can actually lower your tax bill! It's like a magic bullet that shrinks your taxman's bite. That's why you see interest expenses listed first on a company's income statement, before taxes get taken out.

So, debt financing can be a real money-saver, but remember, it's a double-edged sword. Too much debt, or debt that's not managed well, can put a strain on your business. It's like having a giant credit card bill –? it can limit your options and make it tough to grow.

The key is to be smart about debt and use it strategically to fuel your company's success!

Top 3 Debt Metrics for Indian Businesses?

Financial ratios can be powerful tools to assess a company's financial health and debt management strategies. Here are some crucial debt metrics for Indian businesses to monitor, along with explanations of their significance:

Debt-to-Equity Ratio (D/E Ratio)

This ratio compares a company's total liabilities (debt) to its shareholders' equity (the value of the company's assets financed by the owners). A lower D/E ratio indicates a healthier financial position, as the company relies less on debt financing. For Indian businesses, a D/E ratio below 1 is generally considered favorable.

Interest Coverage Ratio (ICR)

This ratio measures a company's ability to service its debt obligations from its current earnings. It's calculated by dividing a company's operating profit by its interest expense. A higher ICR indicates a greater capacity to meet debt payments. In India, an ICR above 2 is usually considered a sign of good debt management.

Current Ratio

This ratio assesses a company's short-term liquidity and its ability to meet upcoming debt payments. It's calculated by dividing a company's current assets (assets that can be converted to cash within a year) by its current liabilities (short-term debts due within a year). A healthy current ratio in India typically falls between 1.5 and 2.5.

5 Questions in a CFO’s Debt Book

Here are 5 crucial questions a CFO should ask to ensure their company has the right funding in place:

By addressing these 5 questions, a CFO can develop a robust financing plan that fuels growth and safeguards the company's future. It's about striking a balance between debt as a tool and debt as a burden.

Closing Thoughts?

In conclusion, managing business debt is both a strategic art and a critical science. The decisions made around debt financing can profoundly impact a company's growth trajectory and financial resilience.?

As CFOs, it's imperative to navigate these decisions with foresight and prudence. Meanwhile, if you are looking to raise capital through debt financing, explore Yubi Credit Market, India's biggest enterprise credit marketplace, connecting businesses with vital capital for sustainable growth.

Stay tuned for more insights in our upcoming series on business debt management, where we'll delve deeper into practical strategies and real-world examples to empower CFOs in their financial stewardship journey.