Separate borrowing, interest and repayment
Debt supplies cash today in exchange for contractual payments. The initial borrowing usually increases cash and a liability without creating revenue. Interest is the cost of borrowing over time; principal repayment reduces the outstanding obligation. Confusing the two distorts both profit and cash flow.
A one-year example
A company borrows $10,000 at 8% annual interest. With no fees and no principal change during the year, annual interest is $800. If it pays $3,000 at year-end, $800 covers interest and $2,200 repays principal. Closing debt is $7,800. Under these assumptions the income statement recognizes $800 expense, not the entire $3,000 payment.
Debt can be secured or unsecured, senior or subordinated, fixed-rate or floating-rate. A fixed rate protects against some rate increases but does not eliminate refinancing risk at maturity. Floating rates can make interest costs rise even with unchanged principal. Fees, discounts and hedges complicate the effective cost.
Liquidity asks whether cash obligations can be met when due. Solvency considers the longer-term ability to meet obligations. A business can report positive profit yet face a liquidity crisis when a large borrowing matures. Inspect a maturity schedule, available cash, committed facilities and covenants; do not rely only on total debt.