This KPI informs you of how much money your business can afford to repay in annual loan repayments.
Example:
A) Annual Loan Repayments = R142,879 B) Net Profit After Interest = R508,327 C) Depreciation = R87,000 D) Cash Profits = R595,327 (B + C) E) Loan Repayment = 24% (A ÷ D X 100)
Discussion:
The logic behind this information is rather similar to your mortgage payments. In simplistic terms, a bank manager will allow you to borrow somewhere in the region of 3 times your salary for a mortgage.
The company's equivalent to your salary is its Cash Profit and the Loan Repayment % states that the amount that you are paying in loan repayments should be less than one third of your Cash Profits.
To ensure that your business can afford to repay its loans, you may need to restructure them over a longer period of time.
Our usual logic tells that we should pay off our loans in the fastest possible time however, it is better to pay a little more in interest payments than it is to go bust through a lack of cash.