Debt capital is the part of a company’s capital that comes from external lenders and creditors, as opposed to equity, which comes from the owners. Debt typically includes loans, credit facilities and trade payables.
What is included in liabilities?
- Short-term debt – e.g. trade payables, overdrafts and other debt due within one year.
- Long-term debt - e.g. mortgages, bank loans and bond debt with longer maturities.
- Any other external financing - leasing agreements, factoring or other debt obligations.
Significance
Debt capital is important for funding growth and operations, but it also involves an obligation to pay interest and repayments. A high share of debt capital can increase a company’s financial risk because it must meet its debt obligations regardless of earnings.
Key figures and analysis
When assessing a company’s financial strength, you often look at the relationship between equity and debt capital, for example through the equity ratio or debt-to-equity ratio. These show how resilient the company is in relation to its debt obligations.
Example
A company has assets of DKK 10 million. Of this, DKK 3 million is financed with equity, while DKK 7 million is financed through bank loans and trade payables. The DKK 7 million makes up the company’s debt capital.