To assess a company’s debt sustainability, check whether the company can repay its loans without financial stress. Look at its income, profits, cash flow, and how much debt it has. If the company earns enough money regularly and doesn’t rely too much on borrowing, its debt is considered sustainable and safe for investment.

What Does Debt Sustainability Mean?

Debt sustainability means the company can handle its loan repayments easily without affecting its business. It can pay interest on time, return the borrowed amount, and still have enough money to run and grow the business. A company with good debt sustainability is financially stable and is a safer option for investors.

Why is Debt Sustainability Important for Investors?

If a company cannot manage its debt, it may default or face losses, which will affect its share price. But if it handles its loans well, it will grow steadily and give better returns to investors. So, before investing, it’s important to know if the company is using debt wisely and not overburdening itself.

Which Ratios Help You Assess Debt Sustainability?

Some simple financial ratios help in understanding debt sustainability. These include:

• Debt-to-Equity Ratio: Shows how much debt the company has compared to its own money. Lower is better.
• Interest Coverage Ratio: Tells if the company earns enough to pay interest. Higher is better.
• Free Cash Flow: Shows how much cash is left after expenses. More cash means better debt handling.

How Does Cash Flow Help in Debt Assessment?

Cash flow shows the real money coming into the company. If a company has strong and stable cash flow, it can pay its debts without any trouble. Even if profits are low on paper, good cash flow keeps the business running. Always check the company’s cash flow statement to see if it can handle its debt properly.

What Are Red Flags in Debt Sustainability?

Avoid companies with high debt, low income, or negative cash flow. If they are taking more loans to repay old ones, it’s a danger sign. Also, if their interest payments take up a large part of their earnings, it means financial pressure is high. These companies may struggle to survive if the market faces problems.

Which Indian Companies Show Strong Debt Sustainability?

Companies like Infosys, TCS, HDFC Bank, and Asian Paints have very low debt and steady cash flow. They manage their finances well and are considered safe by many investors. Investing in such companies can give you peace of mind and stable returns over time.