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Module 9: Corporate Debt Analysis
Module 9: Corporate Debt Analysis
This module brings together your knowledge of the balance sheet and the income statement to evaluate the company's debt sustainability. We are moving beyond simple debt ratios to analyze whether the cash generated by operations is sufficient to service the ongoing cost of borrowing. You will evaluate the company's Interest Coverage Ratio and determine its true financial risk.
STEP 1: OBTAIN THE ANNUAL REPORT
STEP 1: OBTAIN THE ANNUAL REPORT
Open your company's Consolidated Annual Report for the final data extraction. We need to look closely at the financing costs located near the bottom of the Income Statement.
🔽 (Hint): Which exact lines am I looking for?
🔽 (Hint): Which exact lines am I looking for?
From the Income Statement: EBIT (Operating Profit) and "Finance Costs" or "Interest Expense" (usually found right below operating profit).
From the Balance Sheet: Total Debt (Short-term borrowings + Long-term borrowings). Note: Do not include simple accounts payable, only actual interest-bearing financial debt!
STEP 2: DATA MINING
STEP 2: DATA MINING
Transcribe the necessary debt and profit figures into SECTION A of your printed Worksheet. Be careful: interest expense is sometimes listed as a negative number in the report; use its absolute value for your calculations.
🔽 (Hint): Glossary of Debt Analysis
🔽 (Hint): Glossary of Debt Analysis
EBIT: Earnings Before Interest and Taxes (Your ability to pay).
Interest Expense (Finance Costs): The cost of servicing your debt (What you must pay).
Financial Leverage: Using borrowed money to increase the potential return of an investment.
STEP 3: CALCULATIONS AND INSIGHTS
STEP 3: CALCULATIONS AND INSIGHTS
Complete SECTIONS B and C on your printed Worksheet. Calculate the Interest Coverage Ratio (ICR). A ratio under 1.5 indicates a high risk of default, while a ratio over 3.0 indicates strong financial health and high debt capacity.
STEP 4: SUBMIT YOUR REPORT
STEP 4: SUBMIT YOUR REPORT
Review your final debt assessment. Is the company's leverage safe or toxic? Submit your team's ultimate findings to the Crisis Center using the form below.
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