To assess a company’s debt servicing ability, look at how well it can pay back its loans and interest from its profits. If the company makes regular income and keeps its debt under control, it can easily manage its repayments. Use simple financial tools like interest coverage ratio, debt-to-equity ratio, and free cash flow to understand this. These help you know if the company is in a strong position or struggling with debt.

What is Debt Servicing Ability?

Debt servicing ability means how easily a company can pay the interest and repay the money it borrowed. This is important for investors because companies that cannot manage debt properly may face financial trouble. A company with strong debt servicing ability shows that it earns enough to handle its financial duties, and this gives you confidence as an investor.

What is the Interest Coverage Ratio?

Interest coverage ratio tells you how many times a company can pay its interest using its earnings before interest and taxes (EBIT). It is calculated using:

Interest Coverage = EBIT ÷ Interest Expense

If the result is more than 2, it means the company is doing well and can pay interest easily. A lower number means the company is under pressure and may struggle in future.

Why is Debt-to-Equity Ratio Important?

Debt-to-equity ratio compares how much the company has borrowed to how much it owns. A lower ratio means the company is not depending too much on debt and is financially healthy. A high ratio means more borrowed money, which increases risk. A good balance shows responsible financial planning.

How to Use Free Cash Flow to Check Debt Safety?

Free cash flow is the extra money left after the company pays its regular expenses. If this amount is good, it shows the company can easily handle debt payments without any stress. Look for companies that have strong and growing free cash flow year after year. It means they are able to fund their growth and repay debt smoothly.

What are Warning Signs of High Debt Risk?

If a company is taking more loans every year, struggling to pay interest, and its free cash flow is falling, these are warning signs. Also, if credit rating agencies downgrade the company, it means risk is rising. Avoid such companies as their debt may affect future profits and stock price.

Which Companies are Good at Managing Debt?

Companies like Infosys, TCS, HUL, and Asian Paints are known for keeping low debt and having strong cash flows. These companies earn steady income and don’t depend much on loans. For safe and long-term investment, such companies are often preferred by investors.