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Digging deep into debt

High debt doesn't always mean trouble, an inability to repay does

Digging deep into debt

History is full of examples when high debt spelt the death of an enterprise. Hence, it is generally advised that one should stay away from companies that have huge debt on their balance sheets. But debt itself isn't bad; an inability to repay it is. If an indebted company can service its debt properly, debt can actually help it grow faster.

To find out such companies, we applied the following filters:

  • Market cap should be above Rs 500 crore
  • Median three-year ROE and ROCE should be greater than 15 per cent
  • The debt-to-equity ratio should be above 0.75
  • Median and current interest-coverage ratio (ICR) should be greater than three
  • Median and current CFO-to-interest ratio should be greater than three

The 'CFO-to-interest' ratio is derived by dividing the cash flow from operations by the interest amount to be paid. A ratio more than one signifies that the company can service its interest payments with its operating cash flows.
The companies mentioned in the table below not only service their debt on time but also generate decent cash flows and returns on capital and equity.