Debt

Borrowing isn't evil. You probably wouldn't own a home without a loan, and most companies wouldn't own factories without one. The problem is never debt itself — it's debt relative to the ability to repay it.

Interest has one brutal property: it's due in good years and bad. Sales can halve in a recession; the interest bill doesn't. That's why debt is called leverage — like a lever, it multiplies force in both directions. In good times, borrowed money amplifies profits. In bad times, it amplifies losses — sometimes fatally.

Two decoded ratios tell you most of what you need:

Debt-to-Equity: total borrowings divided by shareholders' funds. A ratio of 1 means the company borrowed roughly as much as its owners put in. Below 0.5 is generally comfortable for most industries; above 2 deserves suspicion. (Banks are a special case — borrowing is their business — so never judge a bank with this ratio the way you'd judge a factory.)

Interest Coverage: operating profit divided by the interest bill. In plain words — how many times over can this year's profit pay this year's interest? Coverage of 8x means profits could pay the interest bill eight times; very safe. Coverage below 2x means one bad year could mean missed payments — the corporate equivalent of a family whose EMIs eat most of the salary.

The pattern that has killed more Indian companies than almost anything else: borrowing heavily during a boom to expand, then the cycle turns, profits fall, and the unchanged interest bill devours everything. Names change every decade; the mechanism never does.