The simplest way to measure the cost of debt is the interest rate multiplied by the principal. So if I take out a $1,000,000 loan at 10% interest, my cost of debt is $100,000 per year.
A second-level analysis would include the capital repayments and how they affect my cash flow. So if the same loan were taken out for 5 years, with straight-line amortization, I would owe an additional $200,000 in capital payments each year.
Each year, as I repay capital, my interest payments will decrease, but in total I will be paying between $200,000 and $300,000 per year in payments on the debt. 2-3x my initial analysis.
This may seem very simple and you would be surprised how many people get into trouble focusing only on the interest portion of the debt. As it is the only one that hits your P&L, it is easy to misjudge the impact of the capital repayments on cash flow over time.
A third-level analysis is how I prefer to think of debt. Yes it will cost me interest payments, and yes it will cost me capital payments, but it will also cost me optionality and it will introduce fragility. When you take on debt you are in essence wanting the future, today. Instead of waiting for the ability to pay cash, we use debt to have it now.
We have committed ourselves to a future self, based on our wants today. Want a big mansion today but cannot pay cash? Take on debt that you will need to repay for the next 30 years. Taking on debt commits you to a decision and future outcome. You are committed to that future. Everything you buy with debt boxes you in a little tighter, removing flexibility. Your choices for multiple years have already been made.
You see this with people at high-paying jobs who take on even higher levels of debt. No matter how much they may want to leave, they cannot. They cannot risk a disruption in pay due to the commitments they have taken on.
The same happens in business. The more debt you pile on a business the more committed you are to a future outcome. Even if the market changes, you may not be able to pivot. You already made your choice the day you over-leveraged.
Too much debt reduces your options. Lower optionality introduces fragility into the system, making the business easier to kill. There are fewer future outcomes you will be able to survive the more debt you carry and fewer future opportunities you will be able to take advantage of.