6. Interest:
Given below is the most typical and simple structure of a P/L statement:
6. Interest:
Interest is an expense incurred on loans taken by the business. A change in the interest costs of the company can be attributed to an increase or decrease in the debt outstanding, change in interest rates or currency fluctuations in the case of foreign currency loans.
Many of the best companies in India as well as in the world have extremely low or even no debt. Warren Buffet’s view on debt would help us understand with more clarity, the dangers of high debt:
“Good business or investment decisions will eventually produce quite satisfactory economic results, with no aid from leverage. It seems to us both foolish and improper to risk what is important (including, necessarily, the welfare of innocent bystanders such as policyholders and employees) for some extra returns that are relatively unimportant.”
In the above example, the company is paying Rs. 20 as interest.
