How Much Can a Company Borrow?

A firm’s debt capacity should not be assessed solely by the amount of credit banks are prepared to extend, or by the net debt/EBITDA ratio. Especially in economies such as Türkiye, where interest rates are high, loan maturities are relatively short, and exchange-rate and refinancing risks are material, the relevant test is whether the firm can service interest and principal, on a sustainable basis, from the cash it generates from operations.

Debt-capacity analysis should therefore consider, alongside EBITDA, cash flow available for debt service (CFADS), the debt service coverage ratio (DSCR), interest coverage, the maturity and currency of the debt, working-capital needs and usable liquidity. Net debt/EBITDA is a useful starting indicator, but in a high-interest environment it may not capture the true cash burden of the debt. The same stock of debt may be readily serviceable when rates are low and may seriously strain the firm’s cash flow when rates are high.

In this note the expression “debt service” is used as the counterpart of the English term. It should be understood as the payment of principal and interest.

Debt capacity should be tested not only under current conditions but also under stress scenarios in which sales decline, collections slow, margins compress, interest rates rise and the exchange rate moves adversely. The risk is greater still where the debt is floating-rate or denominated in foreign currency.

For a CFO in Türkiye the basic approach should be to determine not how much the firm could theoretically borrow, but how much debt it could still service safely even under adverse conditions. What determines financial resilience is therefore not the debt level the firm can reach in good times, but the debt level it can continue to service, without interruption of interest and principal payments, even in bad times.

Cash Flows, Not EBITDA, Determine Debt Capacity

For lenders, EBITDA is an important decision criterion. EBITDA is, however, an accrual measure and does not itself show a cash amount. Debt capacity should therefore be calculated by moving from EBITDA to the cash flow that can actually be used to service debt.

In simplified form, cash flow available for debt service (CFADS) may be calculated as follows:

CFADS = EBITDA − cash taxes − mandatory maintenance and replacement capex − additional cash required for working capital ± other operating cash movements

Suppose, for example, that a firm’s annual EBITDA is TRY 300 million. If cash taxes are TRY 35 million, mandatory investment TRY 45 million and the cash required by an increase in working capital TRY 50 million, then CFADS = 300 − 35 − 45 − 50 = TRY 170 million.

Generating TRY 300 million of EBITDA does not, therefore, mean that the firm can pay lenders TRY 300 million a year. In this example the cash actually available for debt service is about TRY 170 million.

One May Begin with the Net Debt/EBITDA Ratio

The net debt/EBITDA ratio is calculated as follows:

Net debt/EBITDA = (financial debt − cash) / EBITDA

If, for example, net debt is TRY 750 million and EBITDA is TRY 300 million, net debt/EBITDA = 750 / 300 = 2.5.

In a general framework, a ratio of around 2.0 or below for a stable industrial firm points to a relatively comfortable capacity to service debt. A ratio in the 2.0–3.0 range calls for closer monitoring of leverage; a ratio above 3.0 requires a more careful assessment of cash flow and debt-servicing capacity.

These levels are not universal rules. The debt that firms in energy, infrastructure, real estate, retail, technology and manufacturing can carry differs from sector to sector. Likewise, a firm may have borrowed substantially to invest, while the period required for those investments to convert into operating profit has not yet elapsed.

In rough terms, a firm with regular and predictable cash flow may carry a net debt/EBITDA ratio of 3.0 with ease, while another business with cyclical revenues may be financially strained even at 2.0.

Net debt/EBITDA is therefore a useful starting indicator, but it should not be treated as the final measure of debt capacity.

The Real Test Is the Debt Service Coverage Ratio

One of the more important indicators in assessing a firm’s debt capacity is the debt service coverage ratio (DSCR).

Debt service coverage ratio = cash flow available for debt service / interest and principal payments

DSCR = CFADS / interest and principal payments

If the firm’s CFADS is TRY 170 million and annual interest and principal payments total TRY 100 million, DSCR = 170 / 100 = 1.70. The result means that the firm has the potential to generate TRY 1.70 of cash for each TRY 1 of debt service.

In the debt policy of a normal industrial firm operating in Türkiye, I regard a target DSCR of 1.50 or above as reasonable, subject to the characteristics of the firm and the sector.

A DSCR of 1.00 shows, in theory, that the debt can be paid, but it leaves the firm no margin for error. A small decline in sales, a delay in collections or an unexpected increase in costs can quickly place the firm in financing difficulty. A safety margin must therefore be left when debt capacity is set.

Why the Interest Rate Has a Large Effect on Debt Capacity in Türkiye

As of August 2026 the Central Bank of the Republic of Türkiye (CBRT) has maintained a tight monetary-policy stance. In the presentation of the August Inflation Report the CBRT stated that it had kept money-market rates at around 40 per cent. In such a financing environment a firm’s capacity to service debt cannot be assessed from the stock of debt alone.

Suppose our example firm has annual EBITDA of TRY 300 million, CFADS of TRY 170 million, and that the CFO will not accept a DSCR below 1.50.

The debt service coverage ratio is calculated as cash flow available for debt service divided by interest and principal payments. Debt service here is not interest alone; it is the sum of interest and principal due in the year in question.

If the CFO does not want the firm’s DSCR to fall below 1.50 in any circumstances, the maximum annual debt service that can be covered by TRY 170 million of CFADS is:

Maximum debt service = TRY 170 million / 1.50 = TRY 113.3 million

In other words, even if the firm’s usable annual cash flow is TRY 170 million, not all of it can be allocated to debt payments. To keep DSCR at 1.50, the firm’s combined annual interest and principal payments should not exceed about TRY 113 million. TRY 113.3 million is the maximum annual debt service the firm can pay.

Now suppose the firm’s effective annual cost of borrowing is 40 per cent. To simplify, assume that the debt does not require amortisation during the term, that principal is repaid at maturity, and that the firm pays only interest during the period.

Annual interest is then equal to the amount of debt × 40 per cent.

Given a maximum annual debt-service capacity of TRY 113.3 million, one may write: maximum debt × 40 per cent = TRY 113.3 million. Hence maximum debt = 113.3 / 0.40 ≈ TRY 283 million. If the firm makes no principal repayment and pays only 40 per cent interest a year, it can therefore borrow about TRY 283 million. The arithmetic can be checked: TRY 283 million × 40 per cent = TRY 113 million, and DSCR = 170 / 113 = 1.50.

In practice, however, most corporate loans do not consist of interest payments alone. Principal must also be repaid during the term.

Suppose, for example, that the loan is repaid in equal principal instalments over five years. About 20 per cent of the opening debt is then repaid as principal each year. The annual principal-repayment rate = 1 / 5 = 20 per cent. For the first year the simplified debt-service burden may be taken as 40 per cent interest + 20 per cent principal = 60 per cent. Each TRY 100 of debt therefore gives rise, in the first year, to about TRY 40 of interest and TRY 20 of principal, or TRY 60 of cash outflow in total. With maximum annual debt service of TRY 113.3 million, maximum debt = 113.3 / 0.60 ≈ TRY 189 million.

If opening debt is about TRY 189 million, first-year interest = 189 × 40 per cent = TRY 75.6 million and principal = 189 / 5 = TRY 37.8 million, so total debt service = 75.6 + 37.8 = TRY 113.4 million. DSCR is then 170 / 113.4 = 1.50.

An important technical point should be noted. Under equal-principal repayment the outstanding balance declines each year, so interest payable in later years also falls. The 60 per cent rate is therefore a conservative approach, essentially for the first year.

A more precise debt-capacity analysis should model principal, interest, CFADS and DSCR separately for each year.

When a high cost of finance and principal repayments are considered together with a cash-flow approach, the debt the firm can actually carry often lies well below the level implied by the net debt/EBITDA ratio.

In a high-interest environment the net debt/EBITDA ratio can seriously overstate true debt capacity. The ratio measures the size of the debt; it does not show the interest rate at which the debt is carried. In periods when interest rates have risen sharply, the firm’s true cash-paying capacity can therefore come under serious strain even if the ratio looks reasonable.

Interest Coverage Must Also Be Calculated

Another indicator that can be used in assessing debt capacity is the interest coverage ratio.

Depending on the purpose of the analysis, it may be calculated as interest coverage = EBIT / net financing expense, or as interest coverage = EBITDA / net cash interest expense.

If, for example, EBITDA is TRY 300 million and cash interest expense is TRY 100 million, EBITDA / interest = 300 / 100 = 3.0.

The point is especially important for floating-rate loans. If the loan rate rises with market rates, interest expense on existing debt can increase even if the firm takes on no new borrowing. It is therefore not enough for the CFO to look only at today’s interest coverage; the CFO should also calculate how far the ratio would fall if, for example, rates rose by 5 or 10 percentage points.

The Maturity of the Debt Matters as Much as Its Amount

Suppose two firms each have TRY 1 billion of debt. For the first, TRY 800 million falls due within the next 12 months. For the second, the debt is spread evenly over five years. Even if the two firms have the same net debt/EBITDA ratio, their financial risks are certainly not the same.

The CFO should therefore also monitor the ratio “next-12-months debt service / usable liquidity”. Usable liquidity should not be confined to cash in the bank. Cash balances, undrawn committed facilities and free cash flow expected to be generated over the next 12 months should be considered together.

Adequate equity on the balance sheet does not mean that a loan falling due in three months can be paid. Liquidity risk is not only a matter of balance-sheet size; it is also a timing problem.

Foreign-Currency Debt Requires a Separate Debt-Capacity Test

For firms in Türkiye, one of the important elements of debt-capacity analysis is the currency of the debt. The CBRT continues to monitor the foreign-currency assets and liabilities of non-financial firms in a separate data set. The basic reason is the importance of foreign-currency debt for firms’ financial-risk profiles.

A structure in which revenues are in lira and debt is in foreign currency is especially risky. The firm may appear to be using a foreign-currency loan at a lower nominal rate; yet if the lira depreciates, the lira equivalent of the debt and the debt-service burden can grow rapidly. Debt should, so far as possible, be matched to the currency of the cash flow that will service it. The capacity of a firm with regular and predictable export revenues to service foreign-currency debt is not the same as that of a firm whose revenues are solely in lira.

A Basic Recommendation to CFOs in Türkiye: Calculate Safe Debt, Not Maximum Debt

In the finance literature, optimal capital structure is an important concept from the standpoint of firm value. Debt has a tax advantage, and under suitable conditions debt finance may be cheaper than equity.

For a CFO in Türkiye, however, the debt level regarded as theoretically “optimal” and the debt level that is “safe” in practice can diverge. Because of high interest rates, variable credit conditions, exchange-rate risk and refinancing uncertainty, the CFO’s concern should shift from “How much debt can I raise?” to “If the firm’s operations turn out worse than I expect, how much debt can I still service comfortably?”

What determines financial resilience is not how much the firm can borrow in good times, but how much debt it can pay in bad times.

A firm’s debt capacity is a far more complex notion than the amount of debt that appears on the balance sheet. A sound analysis of debt capacity requires EBITDA, the capacity to generate cash, the cost of interest, the principal-repayment schedule, working-capital needs, exchange-rate risk, refinancing risk and stress resilience to be assessed together.

One of the most critical mistakes that can be made in Türkiye in periods of high nominal interest rates is to apply, mechanically, net debt/EBITDA thresholds developed in low-interest environments. Debt capacity is determined not by EBITDA, but by the cash that remains under stress. The CFO should always have an answer to this question: “If the economy and the firm’s operations develop worse than we expect, how much debt can the firm still service without difficulty?”