Whether operating earnings comfortably cover financing costs.
| Concept | Explanation | |---|---| | Interest coverage | Operating earnings divided by interest expense. | | Fixed-charge coverage | Ability to cover interest and other fixed obligations. | | Variable-rate exposure | Debt cost changes with market rates. | | Refinancing risk | Future debt may need to be replaced at less favorable terms. | | Credit quality | Assessment of default risk and repayment capacity. |
Key idea: Debt becomes most dangerous when cash flow weakens at the same time refinancing becomes expensive.