In plain language — A company can fund itself with shareholder capital, debt and hybrid instruments. Capital structure shows who provides resources and which claims are paid first.
Common shares, preferred shares, bonds, loans, leases and cash are not equivalent blocks. They carry different rights, costs, maturities and priorities. The structure matters to both shareholders and creditors: identical operations can have very different risk when financial leverage changes.
Net debt: open the shortcut
Net debt is commonly calculated as financial debt minus cash and equivalents. The formula may change for leases, pensions, financial receivables and restricted cash. Not all cash is available for repayment and not all liabilities mature together, so the bridge must be shown rather than hidden behind the total.
Net debt/EBITDA can help compare leverage but inherits the limits of EBITDA. A cyclical business at peak earnings may appear safest when its denominator is most vulnerable. Banks and insurers also require sector-specific measures because debt performs a different operating role.
Interest coverage and the calendar
Interest coverage divides an operating result, often EBIT or EBITDA, by finance cost. A higher result provides more period-specific headroom but does not ensure future payment. Floating rates, refinancing, foreign-currency debt and concentrated maturities can change the picture rapidly.
Place a maturity schedule beside the ratio and examine fixed versus floating rates, currencies, security and covenants. Compare recognized interest with cash paid and review free cash flow. Available liquidity, undrawn facilities and contractual restrictions complete the picture.
From the company to shareholders
In a DCF or enterprise multiple, enterprise value represents operating value for capital providers. Debt, cash and non-operating claims then bridge to equity value. An error here can invalidate an otherwise sound operating forecast.
Advanced review tests margin decline, higher rates, working-capital needs and refinancing at wider spreads. It examines covenant capacity and claim priority without assuming all cash is distributable. Debt can finance productive investment and add discipline; it can also amplify losses and liquidity risk. Terms, maturity and cash generation matter more than a universal threshold. This material is educational, not financial advice.
A refinancing example
A company with comfortable coverage today may face a different test when a large fixed-rate bond matures. Replacing it at a higher coupon increases future interest even if current EBITDA is unchanged. The maturity schedule therefore adds information that the latest coverage ratio cannot contain.
Sources
- IFRS Foundation — IFRS 7 Financial Instruments: Disclosures — Disclosure requirements for financial instruments and their risks.
- U.S. Securities and Exchange Commission — Beginners' Guide to Financial Statements — Guide to statements and notes used to read debt, interest and liquidity.