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Definition

<p style="text-align: justify;">A <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">disclosable</span> <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">expense</span> which comes about as a result of a <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">company</span> having <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">interest</span>-bearing <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">debt</span>. Finance costs are usually disclosed on the <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">Income Statement</span> as a net figure (i.e. interest paid minus interest received). A <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">company</span>'s net finance costs should be compared to its net <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">income</span> or <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">EBITDA</span> to see what percentage of its <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">profits</span> are being paid out as interest. A company is usually considered to be highly <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">geared</span> if it is paying more than one third of its net profits out in interest (i.e. the <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">interest cover ratio</span>). A highly geared company can be vulnerable to an increase in interest rates because it could be faced by the double effect of rising <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">costs</span> and falling <span class="glossary" style="border-bottom: 1px dotted black; cursor: pointer;">sales</span>. </p>