Long-Term Debt

Long-term debt magnifies returns in both directions: interest is a fixed charge, so the same swing in operating profit produces a larger swing in what shareholders keep. Its cost is tax-deductible, which is the tax shield that makes moderate leverage rational, but that shield is worthless to a company with no taxable profit. The covenants attached matter as much as the amount — a breach can accelerate repayment of the entire facility. Note that the portion of long-term debt falling due within a year is reclassified as a current liability, so total debt must be assembled from both sections.