Debt Overhang

What is Debt Overhang?

Debt overhang occurs when a company has so much debt that it cannot easily borrow more funds or invest in new projects, leading to financial distress and stunted growth.

Example of Debt Overhang

A company with $10 million in debt and no way to generate sufficient revenue to cover its obligations may face debt overhang, discouraging new investments.

How To Calculate Debt Overhang

Calculate the company’s debt-to-equity ratio and compare it to industry standards. High ratios often indicate debt overhang.

  • Special Tip: Regularly monitor debt levels and maintain a balance between debt and equity to avoid debt overhang.

  • Advantages 
    • Highlights potential financial distress. 
    • Encourages prudent financial management. 
    • Helps in making informed borrowing decisions. 
  • Disadvantages 
    • Can lead to reduced investment and growth. 
    • May increase the cost of borrowing. 
    • Can cause loss of investor confidence.


What causes debt overhang?

Excessive borrowing, poor financial management, and declining revenues.

Restructuring debt, improving cash flow, and seeking equity financing.

Yes, it can lead to reduced investor confidence and a lower stock price.

It varies by industry, but generally, a lower ratio indicates lower financial risk. 


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