How does debt affect net income?


1 Answer(s)


Sure. You are aware that for any debt a company takes, it has to pay interest expense every year. So Net Income = Revenue - COGS - Op.Ex - Interest - Tax. So if interest expense goes up, proportionately net income decreases and company becomes less profitable.

Assume a company's
Revenue = 10 million
COGS = 3 million
Op.Ex = 3 million
Tax = 1 million
Interest = 0
Now net income = 10-3-3-1 = 3 million
Assuming the company takes 10 million as debt @ 10% interest rate then new interest expense becomes 1 million.
So new net income = 10-3-3-1-1 = 2 million
Thats how net income decreases when new debt is taken by the company.