Two colleagues, Pragathi and Shefali, meet in the cafeteria for lunch. Their conversation turns to Indian equities and one of the few bright spots amid the current turmoil: strong corporate balance sheets. They also discuss the other side of the story — how being too conservative can sometimes limit growth.

Shefali: I have been sitting on funds without the confidence to invest in equities. The recent statement by the Prime Minister on the need for austerity has further shaken my confidence.

Pragathi: Same here friend. But I take my chances and always stay invested. Besides, there are few bright spots, which can reassure an investor. Balance sheet strength of companies has been strong, which is reassuring.

Shefali: Please elaborate. How would you quantify it?

Pragathi: One of the measures is to simply ask if the assets on the balance sheet are generating enough cash to service the debt and more. Interest coverage ratio can capture that information. Mathematically, it is the ratio of EBIT or earnings before interest and taxes over interest charges. A ratio well above 2x indicates that the company is delivering enough profits to cover interest and more.

Shefali: Okay. So, what does the ratio now indicate?

Pragathi: Well, according to my findings, after the Q4FY26 results, around 600 Indian companies that had reported results till the first week of May (excluding banks as banks have high leverage via deposits) have an interest service coverage of around 7.5 times. For a rupee of interest, the companies have generated over ₹7 in EBIT. If one were to stress test Indian companies on financial leverage metrics, I think they will be in a better place.

Shefali: Yes, that is reassuring. But can you put that in a historical context?

Pragathi: Then, let’s go down the rabbit hole. In the more recent context, I have seen this ratio closer to 3.4 times in March 2021: when we were amid a pandemic. But even this is considered a good ratio compared to the absolute zenith of 2010-2012 period. A Credit Suisse analyst had come out with a report – ‘House of Debt’ – in 2012. It was named so because, he said, close to 15 per cent Indian companies had an interest coverage ratio of less than 1. By 2017-18 Indian banks’ NPA ratio was in the 11-12 per cent range. Today, that ratio is less than 1 per cent.

Shefali: Okay. Seems like Indian corporates have learnt a lesson...

Pragathi: Yes, they have. In fact, on the flip side, Indian companies are now too conservative – at the cost of growth. Interest coverage has been constantly rising in the last five years and not because EBIT margins have outperformed. They rose because debt has been underemployed by companies. At some point, investors and current valuations will force companies to pursue growth. It is better for companies to assume a certain degree of manageable risk (debt) before their hand is forced and they announce a Corus style acquisition that backfires. And to be fair, this appears to have thankfully started. Banks now cite commercial and corporate as the fast-growing segments in their loan books over home and retail segments.

Shefali: As famous economist Shakespear said, To be (in debt) or not to be, that is a question companies will ask once the skies are clear I believe.

Published on May 23, 2026