Debt Capacity: How Much Your Company Can Borrow

Quick answer. A company's debt capacity is read first through two ratios the bank computes: net financial debt over cash flow (the repayment capacity ratio) and gearing (net debt over equity). Before any investment project, estimate your borrowing headroom with our loan capacity simulator based on cash flow.

You have a project: a machine, premises, an acquisition, a hire. The decisive question is not "will the bank say yes?" but "how far can my company borrow without weakening its cash position?". Many directors discover their debt capacity on the day they are refused credit, when it can be measured beforehand using the same ratios as the relationship manager. This article gives you the calculation method, the financial-analysis benchmarks used by banks, and a framework to estimate your remaining borrowing headroom before you build your file.

Debt capacity is the amount of additional financial debt your company can absorb while remaining able to repay it over its term. It does not depend on a legal ceiling but on your cash generation and the strength of your financial structure. A highly profitable but already heavily indebted company may have less borrowing capacity than an average but deleveraged one.

A company's debt ratio differs from that of an individual: for a household, the bank reasons on income and an effort rate capped by the financial stability authorities. For a company, it reasons on flows (cash flow, gross operating surplus) and on balance-sheet structure (equity, net debt). These are the figures you must know how to calculate and interpret, alongside your cash management.

Our reading#

In the financing files we support, the most frequent sticking point is not the level of profitability but the readability of the file: poorly restated cash flow, shareholder current accounts confused with bank debt, exceptional items left unisolated. The bank does not lend on your revenue, it lends on your ability to generate cash on a recurring basis. Presenting clean recurring cash flow is often worth more than a good ratio that is poorly explained.

Cash flow (capacité d'autofinancement, CAF) measures the potential cash generated by the business, before investment and financing decisions. It is the numerator or denominator of nearly every debt ratio.

The additive method starts from net income, adds back non-cash charges (depreciation, amortisation and provisions) and removes non-cash income (reversals) and capital gains on disposals. Cash flow is not profit: a company can show modest earnings and solid cash flow simply because it depreciates heavily.

For a bank file, use a recurring cash flow: neutralise exceptional items (a one-off asset sale, a non-recurring indemnity, a non-recurring grant). The bank looks for the cash you will generate every year, not an isolated good year. On this point, our article on the difference between EBE and EBITDA details the useful restatements.

Net financial debt is the sum of financial liabilities (bank loans, restated leasing, bonds) less available cash and liquid investments.

Net financial debt = gross financial debt minus active cash.

Points to watch in the calculation:

• Blocked shareholder current accounts may be treated as quasi-equity by the bank, provided there is a blocking agreement. When unblocked, they are treated as debt.
• Leasing is effectively a financial liability: restate it so you do not understate your real indebtedness.
• Pledged or unavailable cash must not be deducted.

This is the headline ratio of bank analysis. It answers a simple question: in how many years would your company repay its net debt if it devoted all of its cash flow to it?

Repayment capacity ratio = net financial debt / cash flow.

The result is expressed in years. According to the financial-analysis conventions in use in spring 2026 (and not a regulatory text), a ratio below 3 years is generally seen as comfortable, while a ratio above 4 years is frequently a warning sign that can lead to a refusal or tighter conditions. These benchmarks remain indicative: they vary with the sector, the life of the assets financed and each lender's risk policy.

The underestimated risk#

Many directors look at the ratio after the planned loan but forget that the new debt also erodes future cash flow through interest, and sometimes cash through the disbursement. Always calculate the ratio after the project, including the new annuity and its effect on flows. A ratio of 2.5 before borrowing can tip beyond 4 once the financing is included.

Gearing relates net financial debt to equity. It measures the balance between creditor financing and shareholder financing.

Gearing = net financial debt / equity.

As a financial-analysis benchmark (there is no absolute standard and interpretation depends on the sector), gearing below 1 generally reflects a balanced structure, where net debt does not exceed equity. Above 1, financial leverage becomes strong and the company's sensitivity to a drop in activity or a rate increase rises. A very capital-intensive or fast-growing company may justify higher gearing without being at risk.

The financial autonomy ratio completes this reading by relating equity to total assets.

Financial autonomy = equity / total balance sheet.

According to financial-analysis conventions, a financial autonomy ratio becomes acceptable from 20% (below this floor, the company is considered to have low autonomy and to be highly dependent on its creditors). It is regarded as satisfactory above 30%, and the company is described as highly autonomous above 40%. The 20% to 30% range corresponds to autonomy described as average. Here too these are indicative benchmarks, to be weighed against the business model.

The Debt Service Coverage Ratio checks that your flows cover your repayment annuities, principal and interest included.

DSCR = cash flow / loan annuities (principal + interest).

A DSCR above 1 means your cash covers your maturities. In practice, in spring 2026, banks rarely require the strict threshold of 1 and often raise the requirement to 1.2 or 1.3 to keep a safety margin, with a DSCR of 1.5 read as a comfortable margin. Note: the DSCR is often calculated on gross operating surplus or operating cash flow rather than strict cash flow. The French "cash flow over annuities" variant remains tolerated, but ask your contact which base they use to frame your file.

Once these ratios are set, the borrowing headroom is estimated by working backwards: from recurring cash flow and the thresholds you target, you deduce the bearable net debt, then the possible new debt.

1. Start from your annual recurring cash flow.
2. Set the target net debt / cash flow ratio you do not want to exceed (for example 3).
3. Multiply cash flow by this ratio to obtain the maximum tolerable net debt.
4. Subtract your current net debt: the balance is your theoretical additional borrowing headroom.
5. Check that this new debt keeps gearing and DSCR within acceptable zones after the project.

A common case#

An SME generates recurring cash flow of 200,000 euros and carries net debt of 300,000 euros. Its debt / cash flow ratio is 1.5, comfortable. Targeting a ceiling of 3, its maximum net debt comes to 600,000 euros, a gross borrowing headroom of around 300,000 euros. But once the new annuity is included, available cash flow and DSCR tighten: the genuinely financeable headroom is often lower than the theoretical one. It is this gap, between the theoretical and the sustainable, that is worked on in a robust forecast balance sheet.

• The ratios quoted are not legal rules but financial-analysis and banking conventions: no official text imposes a single threshold on every company.
• Thresholds are assessed by sector: real estate, trading and industry do not share the same implicit standards.
• The bank reasons on restated accounts: anticipate its restatements rather than suffer them.
• A favourable ratio that is poorly documented carries less weight than an average ratio well explained in a clear file, ideally supported by an up-to-date financial dashboard.
• Once the loan is granted, these same ratios become commitments to uphold: see our benchmarks on banking covenants for a loan in progress.

• Debt capacity is measured upstream using the bank's ratios: net debt / cash flow, gearing, financial autonomy, DSCR.
• The net debt / cash flow ratio is central: comfortable below 3 years, a warning sign above 4 years, according to financial-analysis conventions.
• Gearing below 1 and financial autonomy above 30% are benchmarks of a balanced structure, not absolute rules.
• The DSCR required by banks is in practice often set at 1.2 or 1.3, not at the strict threshold of 1.
• Always calculate your ratios after the project, new annuity included, to know your genuinely sustainable headroom.