Definition:

Interest Expense on Debt refers to the cost incurred by an entity for borrowed funds. It is the price paid for using someone else's money and is typically expressed as an annual percentage rate.

Formula:

Interest Expense = Principal Amount x Interest Rate x Time Period

How to use the metric:

Interest Expense on Debt is used to assess the cost of borrowing and its impact on a company's profitability. It helps in understanding how much a company is spending on its debt obligations and can be used to evaluate financial health and leverage.

Limitations:

Interest Expense does not account for the principal repayment, which can also impact cash flow. It may not reflect the total cost of borrowing if there are additional fees or penalties. Additionally, it does not consider the tax benefits of interest payments, as interest is often tax-deductible.

Applies to:

This metric is applicable to industries with significant capital expenditures and borrowing needs, such as manufacturing, utilities, and real estate, where companies often rely on debt financing.

Doesn't apply to:

Industries with minimal debt financing, such as technology startups or service-based industries, may find this metric less relevant. These industries often rely more on equity financing or have lower capital requirements.

Summary:

Interest Expense on Debt is a crucial financial metric that helps in understanding the cost of borrowing for a company. It is essential for evaluating financial health and leverage but has limitations in terms of not accounting for principal repayments and additional borrowing costs. It is most relevant in capital-intensive industries.