Debt burden: how much debt is too much

Debt becomes too much not when a ratio crosses a neat round level, but when the repayment schedule no longer fits within the cash flow the business can generate in its bad year. That is the working definition: debt burden is judged not as a level but as the relationship between obligations and the ability to service them under an unfavourable interest rate, an unfavourable price for the company's output and a closed refinancing market. This is why debt that looks moderate can be a fatal risk at one company, while heavy debt at another is simply business as usual.

Stock and flow: these are different questions

Debt burden is measured from two sides, and they must not be confused.

The ratio of net debt to earnings before interest, taxes, depreciation and amortisation answers the question about the stock: how many notional years of earnings it would take the company to pay off its debt in principle. It is a crude measure, but one that can be compared across issuers in the same industry.

Interest coverage — the ratio of operating profit to interest expense — answers the question about the flow: whether earnings are enough simply to pay for the debt without reducing it. A company can have a tolerable stock and still be suffocating on the flow side if the debt was taken on at a high cost. The reverse also happens: a large debt raised at an old, low rate is serviced comfortably until it falls due.

The third question is maturity: what share of the debt has to be repaid in the coming quarters. Debt spread evenly over many years and the same debt concentrated in one repayment date are different burdens at an identical ratio.

Why "net debt" needs checking

Net debt is debt minus cash, and every part of the amount being subtracted deserves a question. The cash may sit in a subsidiary from which it cannot be moved up without the consent of minority shareholders or creditors. It may be collateral for transactions, money held in escrow accounts at a property developer, or the minimum working balance without which the business stops. Cash like this exists in the accounts, but it is not there for repaying debt.

The second caveat is the date. Debt is shown as at the reporting date, and for a seasonal business that date may fall at the best point in the cycle. It is worth looking at a run of consecutive reports rather than a snapshot; this is exactly what the financial reports section is for.

The cost of debt changes without the company doing anything

Floating-rate debt reprices in step with the key rate: the volume of obligations has not changed, the cost of servicing has gone up, and interest coverage has fallen. That is why the structure of the debt by rate type matters more than its size. Refinancing risk sits in the same place: the company planned not to repay the debt but to roll it over into a new issue — and when the maturity arrived, market yields turned out to be different. Just how different can be seen from the bond market and the OFZ curve, which sets the base for corporate rates. The instrument itself is covered in the glossary entry on the debt security.

Where debt hides

• Leases. A retailer's long-term lease obligations are economically close to debt, yet they are often left out of everyday calculations.
• Factoring and supplier advances. Formally these are trade payables; in substance they are financing.
• Guarantees and debt at subsidiary level. The obligation is not consolidated, but the claim will land on the parent company.
• Hybrid and perpetual issues. They do not always count as debt, but the payment on them is real.
• Currency of the debt. Revenue in roubles against debt in foreign currency is a debt burden that grows with the exchange rate, not with management's decisions.

Covenants: the moment the stock turns into a deadline

Loan agreements almost always contain limits on debt burden. Breaching the threshold gives the lender the right to demand early repayment, or raises the rate under a step-up grid.

What debt does to the shareholder

The dividend policies of many Russian issuers tie the payout directly to the level of debt burden: once the threshold is crossed, the payout ratio is cut or the payout is cancelled. This is the most direct channel through which debt reaches the investor: the dividend section and the nearest payouts {{dividend_calendar|limit=5}}.

The second channel is sensitivity. Debt amplifies swings in earnings, and therefore in the stock, which shows up in its beta. The third is the quality of the denominator: the burden is calculated from earnings, and earnings can exist only on paper — this is the subject of a separate article. Debt measured against earnings that bring in no cash looks moderate right up until the first payment.

The industry adjustment

A utility or infrastructure business with a regulated tariff can carry a high burden because its cash flow is predictable. A cyclical one — steelmaking, property development, commodities — has to keep a buffer against a collapse in prices. Banks cannot be read through this logic at all: for them, borrowed funds are raw material rather than debt burden, and they are assessed with other metrics — for example, 3,77 for {{instrument:SBER}} is compared with capital and asset quality, not with interest coverage.

How to look at this on the platform

• The instrument page and the financial reports section — debt, interest and cash flow across a series of periods.
• The events calendar — the dates of reports and redemptions after which the picture changes.
• The bond market — the yield at which the issuer's own bonds trade: the market prices its debt burden earlier and more honestly than any ratio.

There are deliberately no numerical thresholds in this article. Any universal level would be false precision: it depends on the industry, the interest rate and the repayment structure, and the specific values change with every set of results — take them from the instrument page for the date you need.