Debt (e.g. loans) rather than Equity (i.e. share capital) is the favourite source of finance for large business, particularly during periods where interest rates are very low - as now.
Companies with a high proportion of their finance provided by debt are said to be "highly geared". That means they have a high gearing ratio.
When interest rates are low and profits are enough to pay the interest, that's a not a problem. So companies add more debt!
But, what happens when interest rates start to rise and perhaps profits and cash flows weaken?
This short video from the FT explores the potential problem!
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