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what is it and how does it work?

Debt service is a very interesting concept and is used in the financial world, both for the company to understand its situation in relation to its own accounts, and for the market itself to be able to identify its qualities and deficiencies in the company.

After all, a company must not only manage its sales, for it to be a successful company in the market. As the saying goes, “the devil is in the details”, and in many details, including debt, there is both the key to success and the key to failure. Anyway, today we will get to know better what debt service is and how this concept works, check it out.

What this article covers:

What is Debt Service?

Debt service is a financial analysis concept widely used in the world of finance. It is with debt service that the situation of a company is analyzed in terms of its expenses, more precisely with their payment.

The focus analyzed by the debt service is the interest paid by the company and the capital that enters, from this same organization. In other words, debt service makes a practically perfect synthesis between what is being paid and what a company is receiving.

Source/Reproduction: original.

This type of index is especially necessary to understand the solvency of a company, that is, how much a company is available in the market to profit and to pay its debts and what, in the end, will be the most preponderant for the organization.

Another interesting aspect regarding debt service is that this index is not used by – and for – private companies, it is also used to calculate public debt and State resources.

The debtor’s obligation regarding debt service is to pay his interest and debts as quickly as possible, avoiding the dreaded interest on interest. Debt service, as we analyzed it, identifies what interest is being paid by the company and its ability to pay them in the short, medium and long term.

What are the debtor's debt service obligations?

These interests must be immediately analyzed to understand if a company, after all, will sustain itself or not in the market. Once these financial services are studied, a company can then be declared fit to be a good return on investment.

As debt service is also studied from the point of view of the State, the same can be said about a given country. A nation that has a good debt service ratio is necessarily a good nation to invest in.

What are the consequences of non-payment of debt service?

The more a company ends up going into default or even delaying payments and being the victim of more and more interest, the worse its results according to debt service, the less it will attract investors and the less attractive it will be in the market.

When a debt is not paid, it does not just “burn” the company in the market, debts, especially in the case of companies, can generate lawsuits and even a more energetic action by the State, which aims to try to make sure that a certain amount is paid in a certain way. or another.

Is there any way for the debtor to renegotiate the debt service?

A renegotiated debt is generally the best solution for both the collector and the debtor. Thus the debtor avoids the interest and the collector receives at least part of the debt. Therefore, debt service also presents better results than non-negotiation.

In any case, it is important to understand that debt service is an important economic index not only for the company but also for third parties.

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