Corporate debt: a strategic tool or a financial risk?

Corporate debt often has a bad reputation: it's often associated with liquidity problems, insolvency, or excessive risk. However, when managed well, it can become a strategic instrument to drive growth, improve profitability and optimize an organization's capital structure.

What is corporate debt?

Debt represents the financial commitments a company makes to third parties—banks, suppliers, investors, or financial institutions—in exchange for obtaining resources to operate or invest.

It is mainly classified into:

• Short-term debt: Financing that must be repaid in less than one year, such as revolving credit or factoring lines.
• Long-term debt: Commitments that mature in periods greater than one year, such as mortgage loans, financial leases, or bond issues.

Benefits of using debt

Far from being a problem, debt can provide significant benefits if managed properly:

• Financial leverage: allows growth without the need to contribute more of your own capital.
• Tax deduction of interestIn Mexico and other countries, interest is deductible, reducing the tax burden.
• Improved liquidity: helps cover temporary cash flow needs.
• Financing the expansion: growth projects, acquisitions or innovation without diluting shareholder participation.

Associated risks

However, excessive or disorderly use of debt can compromise the viability of the company:

• Over-indebtedness: compromises the ability to pay.
• High financial costs: high rates reduce profitability.
• Credit dependence: limits autonomy.
• Impact on key indicators: liquidity, solvency and profitability.

KPIs to monitor debt

The CFO should establish clear metrics to monitor the level and quality of debt:

• Debt Ratio (Total Liabilities / Total Assets): measures what percentage of assets are financed with debt.
• Net Debt / EBITDA: indicates how many years of operating generation the debt could take to pay off.
• Interest Coverage (EBITDA / Financial Expenses): reflects the ability to cover interest with profits.
• Net Working Capital: measures whether the short term is adequately financed.
• Free Cash Flow / Total Debt: shows the real payment capacity with the operating flow.

How to analyze whether it is worth acquiring debt?

Before contracting financing, the CFO must evaluate:

1. Cost vs. expected return: It is only advisable if the profitability of the project exceeds the financial cost.
2. Impact on financial indicators: Simulate how key KPIs will be affected.
3. Rate and term structure: prefer long-term debt for investment projects and short-term debt for working capital.
4. Stress scenarios: project what would happen with rate increases or decreases in sales.
5. Alternatives to financing: consider capital injection, strategic alliances or reinvestment of profits.

Responsible management strategies

The role of the CFO is key in debt management:

• Define a debt policy with leverage limits.
• Diversify sources of financing (banking, investors, issues).
• Maintain a balance between productive and operating debt.
• Periodically review payment capacity through financial projections.

Final reflection

Debt is not the enemy of companies: it is a tool that, if used with financial discipline and strategic vision, can become a growth engineThe key is to distinguish between good debt (which finances profitable projects) and bad debt (which covers recurring deficits without a fundamental solution).