Debt

What is Debt?

In accounting, debt is the amount of money or property that a company borrowed from other entities. Debt gives the company the permission to use the proceeds, but it must be paid back on a later date, together with an interest.

On a financial statement, debt usually lies under the liabilities section on the Balance Sheet. Usually, investors and business managers would want to see the company’s level of leverage - how much debt a company carries compared to its total amount of assets or cash. The leverage ratio reflects whether the company is able to pay back its debt using its resources on hand. If not, there might be a risk that the company can’t pay back its debt and get into liquidity problems.

However, debt is not always a signal of risk. In certain scenarios, appropriate use of debt can signal a healthy and expanding business. This is because debt is also an essential source for a company to raise capital at a relatively low cost compared to equity. The company can use its proceeds to acquire assets, invest in future company expansion, or support M&A activities.

The bottom line is, when talking about debt, balance is the key. It is important for investors to understand the capital structure (the ratio between equity and debt, the terms of each debt and equity instrument) as well as where and how they use the debt proceeds.