Financial statements
Can the company afford its debt?
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Company debt and borrowing: the definition
Company debt is money a business has borrowed and must repay under agreed terms. Assessing it means checking cash, interest costs, repayment dates and the conditions attached to the borrowing.
What it means
A borrowing figure on its own tells you very little. Read it alongside the cash the company can use, the earnings supporting its interest bill and the dates when lenders expect repayment. This guide is aimed at ordinary operating companies. Banks and insurers need a different approach because financing is part of their business model.
Start with net debt, then check the cash
A simple net debt calculation is borrowings minus cash and cash equivalents. Company definitions differ, particularly over leases and restricted cash. Read the reconciliation in the results before comparing two businesses.
Cash shown at the reporting date may be needed for wages, suppliers or seasonal trading. Some balances may not be freely available. Look at movements through the year as well as the closing balance. Net debt is a useful starting point, not a complete picture of funding needs.
Check interest cover and leverage
Interest cover compares earnings with interest costs. One common calculation is operating profit divided by interest expense for the same period. Higher cover leaves more room for profits to fall or interest costs to rise. Check the definition: a lender may use adjusted earnings or a different interest measure.
Net debt divided by annual EBITDA is another common borrowing measure. EBITDA means earnings before interest, tax, depreciation and amortisation. It is not cash available to repay debt: tax, investment and working capital still need funding. A negative or very small EBITDA figure makes this ratio unhelpful. There is no single safe ratio for every business.
Read the repayment dates and lending conditions
Debt maturity is the repayment date. Look for amounts falling due over the next year and beyond it. Refinancing means replacing or renewing borrowing. Discussions with lenders are not the same as a signed facility. Check whether rates are fixed or floating, and when any protection against rate rises ends.
A covenant is a condition in a lending agreement, such as a maximum debt ratio. Headroom is the margin before a limit is reached. Check the exact calculation and test date. A breach can give lenders rights to restrict funding or demand repayment, depending on the agreement. A waiver needs lender agreement; it does not cancel the debt.
Find the evidence in the announcement
Start with the cash flow statement, borrowings note and liquidity disclosures in the latest results. Then check later RNS updates for new facilities, repayments or covenant changes. Distinguish the full size of a facility from the amount already drawn and the remaining amount available to borrow.
Read any going concern disclosure about reliance on refinancing, asset sales or a fundraise. A material uncertainty deserves attention, but is not a statement that failure is certain. Check what management needs to achieve and by when.
ILLUSTRATIVE EXAMPLE
Imagine a fictional company with £50m of borrowings and £10m of unrestricted cash. Its annual EBITDA is £20m, operating profit is £15m and interest expense is £5m. For this simplified example there are no leases or other adjustments to the debt figures.
| Net debt | £50m − £10m = £40m |
|---|---|
| Net debt / EBITDA | £40m ÷ £20m = 2.0 times |
| Interest cover | £15m ÷ £5m = 3.0 times |
Now suppose annual EBITDA falls to £15m, operating profit falls to £10m and interest expense rises to £6m. With net debt unchanged, leverage rises to about 2.67 times and interest cover falls to about 1.67 times. The borrowing has not increased, but the earnings supporting it have weakened.
Suppose £30m of the borrowing also falls due in nine months. The £10m cash balance alone cannot repay it, and the business still needs operating cash. Check expected cash generation and confirmed funding arrangements. The ratios above do not answer that timing question.
TRY YOUR OWN NUMBERS
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Use £ millions throughout. Use operating profit, interest expense and EBITDA for the same full-year period, and borrowings and available cash from the same reporting date.
Definitions differ over leases, restricted cash and adjustments. These simplified ratios do not test covenants or repayment timing and are not designed for banks or insurers. There is no universal safe ratio.
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A common misunderstanding
A company can meet its interest bill today and still face a repayment problem later. Equally, a low net debt figure does not prove that all its cash is available or that its lending conditions will be met.
What to check
- What is included in net debt, especially leases and restricted cash?
- Do the cash flow figures support the profit being reported?
- How have interest cover and debt ratios changed on the same basis?
- How much must be repaid, on what dates, and which funding is already agreed?
- What are the covenant limits, test dates and remaining headroom?
- What would weaker trading or higher interest costs do to the position?
Read the debt, the cash and the repayment timetable together. Affordability depends on all three.
Sources and review date
Reviewed by Edravo on 6 September 2026.
- FRC: Going concern, borrowing facilities and liquidity risks (2025 guidance) (opens in a new tab)
- FRC: Cash flow and liquidity disclosures (2020 thematic review) (opens in a new tab)
- ACCA UK: Ratio analysis and interest cover (opens in a new tab)
- Babcock 2025 results, FCA archive: net debt definitions and covenant adjustments (historical reference) (opens in a new tab)
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