During our interaction with clients in Surat that are preparing for their IPO journey, we find that there is either misunderstanding or lack of understanding for Debt (leverage).
We often find companies that must take debt are not taking the debt as well as the companies that should not take the debt are taking very high debt.
For most entrepreneurs, profit is the most visible measure of success. But serious businessmen know that profit alone does not tell the full story. The more important question is: What return are we generating on our own capital?
Yes, we are talking about leverage.
Leverage, in simple terms, means using other people’s money (OPM) to create larger business outcomes than one’s own capital alone would permit. This may be done through debt or equity, but debt remains one of the most powerful and most misunderstood tools in business.
In my view, if an entrepreneur is not using debt at all, he may well be doing a disservice to his business. This is not an argument for reckless borrowing. It is an argument for understanding the difference between productive debt and destructive debt.
Productive debt helps create assets, expand capacity, improve cash flow, or generate returns that exceed the cost of borrowing. Destructive debt, on the other hand, is debt taken without planning, without repayment visibility, or for purposes that do not create sufficient economic value. One builds a future. The other creates a trap.
In the Gujarati Baniya community, there is a saying: “Vaniyo vyaj thi gabharato nathi” — a businessman does not fear interest. The meaning is not carelessness. The meaning is that interest should not frighten us when borrowed capital is being used intelligently and profitably.
The principle is straightforward. If a business can earn a return higher than the cost of debt, then debt can improve return on equity. Suppose a businessman has ₹1 crore of his own capital and earns 18% on it. He makes ₹18 lakh. If he borrows another ₹1 crore at 10% interest and earns the same 18% on total capital employed, then the business generates ₹36 lakh. After paying ₹10 lakh as interest, ₹26 lakh remains. In effect, his return on his own capital rises from 18% to 26%.
This is the essence of “trading on equity” and as an IPO advisor in Surat, this is what we have been advocating.
Of course, leverage works both ways. If returns fall below the cost of debt, the same structure can reduce profitability and increase pressure. That is why debt must be used gradually, with calculation, and with enough buffer to survive lean periods. Business does not move in a straight line. There are recessions, delayed receivables, market shocks and operational setbacks. A wise entrepreneur borrows not only for growth, but with the humility to prepare for adversity.
This is also why ambitious businessmen study the balance sheet as closely as the profit and loss account. The average entrepreneur often focuses mainly on turnover and margin. The more far-sighted one asks deeper questions: What assets am I building? What liabilities am I carrying? What cash flows will these assets produce? Can my structure support larger opportunities?
At times, the real game is not merely understanding the P&L. It is understanding the balance sheet better.
Business history also shows that Ambani and Adani grew exponentially because Dhirubhai and Gautam bhai understood capital, leverage and financial architecture at an altogether different level. Operational strength matters. But financial strategy can multiply scale in ways that product strength alone cannot.
I know of a person who took the loan to acquire a property comprising around 85 flats, leased them to a corporate, and used rental income to service the loan. Over time, the loan (debt) will likely reduce substantially, while the underlying asset remains with him. Later, that asset itself can become collateral for another larger opportunity. This is how intelligent leverage can accelerate wealth creation.
But leverage is not merely a financial decision. It is also a psychological one. The level of debt must match the temperament of the entrepreneur. Some people can handle leverage calmly; others lose sleep and clarity under financial pressure. Even mathematically sound debt becomes dangerous if it exceeds the borrower’s emotional capacity.
In the end, wealth creation rests on three pillars: principal capital, rate of return and time horizon. Most people focus on return and time. Very few think deeply about enlarging the principal base itself.Leverage, when used wisely, is one of the most effective ways to do exactly that.
So the real question for businessmen is not whether debt is good or bad. The real question is whether they understand how to use it productively, prudently and profitably.
Those who fear debt completely may remain smaller than they need to be. Those who respect the leverage, study it and use it wisely can build far larger enterprises.
