Debt Repayment refers to the cash used by a company to make principal payments on its short-term and long-term borrowings, such as bank loans, bonds, and lease liabilities. It excludes interest payments, focusing solely on reducing the debt balance on the balance sheet.
Why is Debt Repayment Important?
Debt Repayment is important because it:
Reduces Financial Leverage: Lowers the company’s debt burden and interest obligations over time.
Impacts Cash Flow: Represents significant financing cash outflows that affect liquidity and capital availability for other uses.
Improves Credit Profile: Demonstrates financial discipline and can enhance the company’s creditworthiness and borrowing terms.
How is Debt Repayment Calculated?
On the cash flow statement, Debt Repayment is reported in the financing activities section and calculated as:
Debt Repayment = Cash Paid for Principal Repayments on Short-Term and Long-Term Debt
Where cash outflows include:
Principal Payments on Bank Loans: Scheduled repayments of term loans and lines of credit.
Bond Redemptions: Cash used to retire bonds or notes maturing during the period.
Lease Liability Payments: Portion of lease payments reducing the lease liability under finance leases.
Additional Considerations
Distinction from Interest: Interest expense is reported separately; Debt Repayment reflects only principal reduction.
Refinancing Effects: New borrowings may offset repayments, so analyzing net debt change provides a clearer leverage picture.
Covenant Compliance: Meeting principal payment schedules is critical to maintaining compliance with debt covenants and avoiding defaults.