Debt Repayment or Share Repurchase: What Each Returns

Debt repayment buys a contractual saving: the interest rate on the borrowing, less tax. A share repurchase buys earnings at the market price, so its return is whatever the earnings yield happens to be on the day. The two also move different constraints. Repaying borrowings with cash leaves net debt untouched, and a repurchase raises it.

Both routes take the same cash out of the same door and hand something back. Handing something back for the same cash is what makes the two routes comparable in the first place, and that is rarer than it looks: most of the things a company can do with a rupee return something that has to be forecast before it can be counted. Repayment and a repurchase do not. One returns a charge that stops being payable, and the other returns the earnings that were already attached to the shares bought. Both of those are countable in the year they happen, and both are already after tax. Run side by side on seven tests, the two point the same way on three of them and in opposite directions on four.

What is each route, before either is compared?

Route one is a repayment. Harivansh Packaging Limited, an invented packaging manufacturer, holds Rs 140 crore of cash and carries Rs 740 crore of borrowings. The company hands the cash to whoever it borrowed from, the borrowing falls, and from that day the interest attached to the repaid amount stops being charged. Nothing is bought and nothing is sold. The company receives the disappearance of a payment obligation, and the agreement that created the obligation fixes the size of that receipt.

Route two is a repurchase. Harivansh Packaging Limited takes the same Rs 140 crore into the market, buys its own shares at the price they are trading at, and cancels them. The share count falls. The company receives the earnings that used to belong to the holders of those shares and now belong to the holders who stayed. No agreement fixes the size of those earnings. The earnings are whatever the business earns, in whatever year it earns them.

The whole comparison sits on that one asymmetry: one route buys a number written into a contract, and the other buys a number the business has to go out and produce. Think of a household with Rs 2,00,000 saved, a loan outstanding, and a share in the vegetable stall on the corner. Paying down the loan returns exactly the loan rate, every month, whether trade is good or bad. Buying a bigger share of the stall returns whatever the stall makes. Both are real returns. Only one of them arrives on a schedule somebody signed.

What does each route return for the same rupee?

Harivansh Packaging Limited does not publish a borrowing rate, so start with the rate. The record carries a finance cost of Rs 60 crore for the year and borrowings of Rs 740 crore at the year end. Dividing one by the other gives 8.11 per cent, and what that number is has to be said out loud before it is used. The 8.11 per cent is an implied average rateA rate worked out backwards from two published figures rather than read off an agreement. The implied average rate covers everything that was outstanding, so no single loan need actually carry it. struck across whatever was outstanding through the year, computed against a single year-end balance, and it is not necessarily the rate on any tranche the company could walk in and repay tomorrow. Every later use of the rate carries that label.

On that rate, Rs 140 crore of repayment removes Rs 11.35 crore of interest from the year. The charge was deductible, so the company keeps three quarters of it. Rs 8.51 crore stays inside after tax at this entity's own effective rate of 25.0 per cent. Against the Rs 140 crore that went out of the door, Rs 8.51 crore is a return of 6.08 per cent.

The repurchase is struck on exactly the same basis, and it has to be, or the comparison means nothing. Rs 140 crore at the illustrative price of Rs 300/- as at 28 August 2026 buys 0.4667 crore shares. The cancelled shares carried Rs 12.50/- of earnings each, so the company has picked up Rs 5.83 crore of annual earnings. Set against the same Rs 140 crore leaving by the same door, the figure comes to 4.17 per cent, and Rs 8.51 crore against Rs 5.83 crore is a difference of Rs 2.68 crore in the year on identical money. The 4.17 per cent is the earnings yieldWhat a rupee of share price buys in annual profit, read as a percentage. The earnings yield is the price to earnings multiple inverted, already struck after tax. at that price and nothing else.

Both figures are after-tax returns struck on the cash that actually left. Striking them the same way is what allows them to sit in the same column at all, and it is unusual rather than typical among the things a company can do with a rupee. Most competing uses return something that has to be forecast first, discounted, and argued about. Repayment and a repurchase return a number that can be counted in the year it arrives.

The third row is the one that gets skipped. Interest is a pre-tax charge and earnings are a post-tax figure, so putting the raw 8.11 per cent beside the raw 4.17 per cent compares two things measured differently and flatters the repayment by a third. Take the tax off one leg and not the other and the ordering can invert on its own, with nothing in the business having changed. Same tax treatment, same denominator, then compare.

Which of the two returns is certain, and which is not?

Here is the difference most comparisons leave out, and it survives even when the two percentages happen to match. The Rs 8.51 crore that Harivansh Packaging Limited keeps by repaying is the removal of a payment somebody contracted to receive. An agreement produces that saving rather than a trading result, so the saving arrives in a bad year exactly as it arrives in a good one. Nobody has to sell anything for it to show up.

The Rs 5.83 crore behind the repurchase is this year's earnings, attached to shares that no longer exist. Next year those earnings may be larger, and they may be smaller, and the record for Harivansh Packaging Limited carries no forecast and no time series, so which it will be cannot be settled here. The shape of the promise is the part that is settled: there is not one.

Two returns of the same size are not the same offer when one is written into an agreement and the other is a result the business still has to produce. The household comparison holds here too. Paying down the loan saves the interest whether the vegetable stall has a good month or a terrible one. Buying a bigger share of the stall pays nothing at all in a month when the stall makes nothing. If both looked like six per cent last year, only one of them looked like six per cent because somebody signed for it.

The gap between an agreement and a result is the reason a company can rationally take the lower of two returns. A business pushing hard against its cash interest bill is buying certainty when it repays, and certainty has a value that no percentage prices.

What does each route do to earnings per share?

Both routes raise it, and they raise it for reasons that have nothing to do with each other. Follow the repayment first. Harivansh Packaging Limited's finance costThe interest and related charges a company reports for a year across everything it has borrowed. The finance cost sits between operating profit and profit before tax on the ladder. falls by Rs 11.35 crore, so profit before tax rises by that amount, tax takes a quarter, and profit after tax goes from Rs 225 crore to Rs 233.51 crore. The share count has not moved. Divide Rs 233.51 crore by 18.00 crore shares and earnings per share is Rs 12.97/-, up 3.8 per cent from Rs 12.50/-.

Now the repurchase. Buying shares changes nothing on the profit ladder, so profit after tax does not move at all. The denominator changes instead: 0.4667 crore shares are cancelled and the count falls to 17.53 crore. Divide the unchanged Rs 225 crore by 17.53 crore and earnings per share is Rs 12.83/-, up 2.7 per cent.

The fact that both routes raise earnings per share is exactly why an earnings test cannot choose between them. One moved the numerator and the other moved the denominator, and a test that only reads the direction of the answer cannot tell those apart. Reading only the direction is a bit like judging two runners by whether they finished, when one ran and the other cycled.

Notice also how small the difference is. Rs 12.97/- against Rs 12.83/- is fourteen paise, on a base of Rs 12.50/-. The return difference underneath, 6.08 per cent against 4.17 per cent, is nearly two full percentage points on the rupee. The earnings line compresses a real gap into something that looks like a rounding difference, and that compression is the second reason not to decide on it.

What happens to net debt under each route?

Net debt is where the intuition usually fails, and the mistake is so natural that it is worth drawing rather than asserting. Net debtBorrowings less the cash a company holds against them. Lenders and analysts use it because cash sitting on the balance sheet could be handed straight back to the lender. takes borrowings and subtracts cash. On the balance sheet of Harivansh Packaging Limited sit borrowings of Rs 740 crore against Rs 140 crore held in cash, so net debt reads Rs 600 crore and net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) is 1.26 times against EBITDA of Rs 477 crore.

Repay Rs 140 crore out of that cash and two things move at once. Borrowings fall from Rs 740 crore to Rs 600 crore. Cash falls from Rs 140 crore to nil. Subtract the second from the first and the answer is Rs 600 crore, exactly what it was before the payment was made. The ratio holds at 1.26 times, unchanged to the second decimal.

The cash that disappeared was already being subtracted, so repaying borrowing out of held cash reduces gross borrowings and leaves net debt exactly where it was. The household version makes it obvious. A household with Rs 2,00,000 in a savings account and Rs 5,00,000 of loan outstanding is Rs 3,00,000 in the hole. Using the savings to pay down the loan leaves nil in the account and Rs 3,00,000 of loan, and the household is still Rs 3,00,000 in the hole. Nothing about the net position moved, however much better the loan statement looks.

Now run the repurchase through the same measure and watch it go the other way. Cash falls from Rs 140 crore to nil, exactly as before. Gross borrowingsThe borrowing figure before any cash is deducted from it. The gross figure appears on the face of the balance sheet and is the number most eyes land on first. stay at Rs 740 crore. No borrowing was touched at all. Net debt is therefore Rs 740 crore, up by the full Rs 140 crore, and net debt to EBITDA moves from 1.26 times to 1.55 times.

A company can repurchase its own shares and end the day more leveraged than it started, without borrowing a single rupee. Ending the day more leveraged is the opposite of how a repurchase is usually described, and the arithmetic behind it is a single subtraction. Cash was standing between the borrowings and the measure. Spend the cash and the measure sees the borrowings undefended.

Which constraint does each route actually relieve?

The net debt arithmetic leads straight here, where the comparison stops being about the two routes and starts being about the company. A constraint is only relieved if the route moves the measure the constraint is written on. So the question becomes: which measure is Harivansh Packaging Limited actually pushing against?

Suppose it is a leverage ceilingA level of net debt against earnings that a company states it will not exceed, or that a lender writes into an agreement. Crossing it triggers a conversation rather than a calculation., a stated level of net debt to EBITDA. The measure sat at Rs 600 crore before and sits at Rs 600 crore after, so repaying out of held cash relieves nothing. The repurchase makes it worse, taking the ratio to 1.55 times. Against that constraint, one route does nothing and the other moves in the wrong direction.

Now suppose the binding constraint is interest coverOperating profit divided by the finance cost for the year. Interest cover measures how comfortably the interest bill is met out of trading, rather than out of cash already banked. or the cash interest bill itself. Operating profit is Rs 339 crore and the finance cost is Rs 60 crore, so cover is 5.65 times. Repay Rs 140 crore and the finance cost falls to Rs 48.65 crore, so cover rises to 6.97 times, a movement of more than a full turn. The repurchase leaves the finance cost at Rs 60 crore and operating profit at Rs 339 crore, so cover stays at 5.65 times exactly.

Repayment does everything for interest cover and nothing for net debt, and the repurchase does the reverse. Choosing between them requires knowing which constraint binds, and that is a question about the company rather than about the two routes. No amount of extra arithmetic can answer it, because the answer is not in any of these numbers. The answer sits in a covenant somebody signed, a rating conversation somebody is having, or a board's own stated ceiling.

Notice what this does to the word deleveragingBringing borrowing down relative to the earnings that have to service it. Deleveraging is a statement about a ratio, so it depends on which borrowing measure and which earnings measure are being used.. A company that repays borrowing out of held cash has reduced the number on the face of its balance sheet and has not changed its position against earnings at all. Whether that counts as deleveraging depends entirely on which measure the listener has in mind. The honest sentence names the measure rather than the verb.

What does each route foreclose?

Both routes consume the same Rs 140 crore, so each one forecloses the other and everything else the money could have done. The foreclosure is symmetric and worth saying plainly. A comparison that only lists what each route gives leaves out half the transaction. Committing Rs 140 crore to a repayment is also a decision not to repurchase, not to spend it on capacity, and not to hold it against something that has not happened yet.

Where the symmetry breaks is in getting back out. Undoing a repayment means borrowing again, at whatever rate is available on the day. Undoing a repurchase means issuing shares again, at whatever price the market is paying on the day. Neither of those two numbers is knowable today.

The asymmetry in the unknowns is the honest version of the reversibility argument. Commentary often says a repurchase is more permanent than a repayment, or the reverse, and both claims quietly assume a future price or a future rate that nobody holds. The narrower and more useful statement is this: the cost of reversing either route is set by a market on a date in the future, and the record for Harivansh Packaging Limited carries neither figure.

What do both routes do to the same Rs 140 crore?

Here is the whole run in one place, on Harivansh Packaging Limited's own figures. Profit after tax is Rs 225 crore on 18.00 crore shares. EBITDA is Rs 477 crore, operating profit is Rs 339 crore and the finance cost is Rs 60 crore, with Rs 740 crore borrowed and Rs 140 crore held in cash. The effective tax rate is 25.0 per cent, this entity's own, and the share price of Rs 300/- is illustrative as at 28 August 2026.

Read the table downwards once and the shape of the argument appears. The two routes are nearly indistinguishable on the earnings line, the line most commentary quotes. The same two routes are as different as two routes can be on the balance sheet lines, where a lender looks. And they differ by nearly two percentage points on the last line, the only line struck on a basis both of them share.

One caution on the Rs 11.35 crore. The Rs 11.35 crore is Rs 140 crore multiplied by the implied average rate of 8.11 per cent, and that rate is derived from the finance cost of Rs 60 crore against year-end borrowings of Rs 740 crore. If the tranche Harivansh Packaging Limited could actually repay carried a different rate, this figure moves with it, and the record carries no tranche-level rate to check against. The method survives, not the Rs 11.35 crore.

At what borrowing rate would the answer change?

Everything above is specific to one rate and one price. Turn it into something general by asking where the two returns meet. The repayment return is the borrowing rate multiplied by one less the tax rate, so at a 25.0 per cent effective tax rateThe tax charge for a year expressed as a share of profit before tax. The effective rate can differ from any headline rate because of timing differences and items taxed differently. it is the rate times 0.75. The repurchase return is the earnings yield, and the earnings yield does not depend on the borrowing rate at all.

Set them equal. The rate times 0.75 equals 4.17 per cent when the rate is 5.56 per cent. Above 5.56 per cent, repaying borrowing returns more per rupee than repurchasing shares at Rs 300/-. Below it, the repurchase returns more. At exactly 5.56 per cent the two hand back the same amount and there is nothing to choose between them on return.

The honest general statement is not that one route wins. The two swap places at a rate anybody can compute for any company: divide the earnings yield by one less the tax rate. The division takes two seconds and it converts a worked example into a rule.

Two endpoints make the rule concrete. At a borrowing rate of 6.0 per cent the repayment returns 4.50 per cent after tax, only a third of a point clear of the yield, and at 12.0 per cent it returns 9.00 per cent, better than twice it. Two sanity checks as well. At a borrowing rate of 4.0 per cent the repayment returns 3.00 per cent after tax, below the 4.17 per cent yield, so the repurchase wins. And a rate of 4.17 per cent looks like it ought to be the meeting point, yet leaves only 3.13 per cent after tax, still below the yield. Forgetting that only one of the two legs is taxed on the way in is the commonest way to get the crossing wrong.

Move the slider below 5.56 per cent and the shaded band on the left lights the region where the ranking reverses. The shaded band is the part a single worked example cannot show, and it is the reason the crossing rate is worth carrying away rather than the 6.08 per cent. The specific number belongs to one company on one day. The rule belongs to the reader.

What does this comparison still not settle?

The comparison does not settle which route Harivansh Packaging Limited should take. The arithmetic is computable and the choice is not, and the gap between the two is the point.

Four things stand between the arithmetic and the decision. Which constraint actually binds, a covenant and a board conversation rather than a calculation. How certain next year's earnings are, a question the record for Harivansh Packaging Limited leaves open with no forecast and no time series in it. Whatever else the Rs 140 crore is wanted for, a queue of competing uses rather than a pair. And what the price or the rate will be on the day either decision is unwound, a figure nobody holds today.

Set both returns against what the business already earns and the frame widens once more. Operating profit of Rs 339 crore against capital employedThe total of the money a business is running on, equity and borrowings together, against which its operating return is measured. Capital employed is a balance sheet total rather than a cash figure. of Rs 2,390 crore is a return on capital of 14.2 per cent, which is 10.6 per cent after tax at 25.0 per cent. Both 6.08 per cent and 4.17 per cent sit below that. Everything on both sides of this comparison is knowable and the choice is not.

That last comparison is easy to over-read, so take one caution with it. The 10.6 per cent is the after-tax return the existing capital earns, not an estimate of what Rs 140 crore of additional capital would earn if it were put into the same business. Nothing in the record sizes that, so the 10.6 per cent is context for the two returns rather than a third route to choose. Stopping there is the honest place to stop.