Understanding Debt in balance sheet

One of most important checklist item before investing is to understand how much debt or leverage the firm has taken relative to the total equity in the balance sheet. Another important factor is to see how much of the shares are pledged by the promoters of the firm. These 2 factors should be weighed in proportion to their earnings as well.

Its key to understand a factor called interest coverage ratio while arriving at decisions. The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest on its outstanding debt. The interest coverage ratio may be calculated by dividing a company’s earnings before interest and taxes (EBIT) during a given period by the company’s interest payments due within the same period.

Here is a video I created to explain the Debt in Balance sheet

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