Debt-free companies

In your previous article on Debt-free companies, you talked about the zero debt companies losing out on tax shield that companies which employ debt enjoy. Can you further elaborate how debt free companies lose out on this advantage?

- Akash Puri 

Editor Responds: 

In simple words, tax shield is the reduction in the taxable income of the company which is attained by claiming various allowable deductions, such as the interest expense, depreciation or amortisation. These deductions reduce the taxable income for a given year or might defer taxes to future. Since zero debt companies have no interest expense that can be deducted, they miss out on this reduction of taxable income, thereby, paying more taxes. Hope this helps you understand the concept. Keep writing to us and assist us with your feedback!