Interest expense

Interest expense is the cost a company incurs for using borrowed money during the period (a quarter or a full year). It covers interest on bank loans, bonds, revolving credit facilities, lease liabilities, and any other form of debt on the balance sheet.

It sits below operating income on the income statement in the section commonly called below the line or non-operating, reflecting the fact that it is a consequence of financing decisions rather than operating performance. The amount is determined by the outstanding debt balance multiplied by the applicable interest rate, meaning it is largely fixed in the short term and does not flex with revenue. This makes high interest expense dangerous in a downturn when operating income compresses but debt obligations remain.

In leveraged buyouts and highly indebted companies, interest expense can be large enough to turn a profitable operating business into a net loss at the bottom line. This is precisely why private equity analysis focuses on EBITDA and debt serviceability rather than net income.