Debt service

Debt service joins the cost of borrowing with repayment of the borrowed amount. It is a cash obligation, so earnings-based measures are only a first screen. Seller repayments may add further demands even if a bank’s chosen ratio excludes them. An acquisition that closes with balanced funding can still fail if the subsequent payment schedule exceeds cash available.

The collection illustrates £500k bank principal, £250k first-year interest and £100k seller repayment against £1m earnings. Together those payments consume £850k and leave £150k before tax, investment and working-capital adjustments. That remainder is not demonstrated free cash flow. The example teaches why a profitable company can have little room for another salary or a delayed customer receipt. Watch source

Debt-service coverage compares an agreed cash or earnings measure with specified payments. Sey sometimes uses rough earnings and cites a 1.3-times preference, but does not supply a universal lender definition. Establish the numerator, included obligations and measurement period before comparing ratios. Then stress the actual schedule under weaker trading. Completion starts this operating responsibility rather than ending the acquisition project. Several simultaneous acquisitions can create several repayment commitments, while cash at one entity may not be freely available to another. Assess both the group total and where the money is needed. Watch source Watch source

Follow the connections

Cash flow · Amortization · Leverage.

Continue in the course: Debt terms and covenants.