Interest Expense

Interest is a fixed obligation, so it converts business volatility into shareholder volatility: the same swing in operating profit produces a much larger swing in net profit for a leveraged company. Interest capitalised into an asset under construction does not appear here, which can make a company building a large plant look far less indebted than it is until commissioning. Comparing interest expense with average borrowings gives an implied cost of debt, and a figure far below market rates often signals capitalised interest or related-party lending. Interest is tax-deductible, which is the entire basis of the tax shield argument for debt.