Debt contracts often use accountingbased measures like working capital interest coverage and debtequity ratios These numbers help lenders assess a borrowers financial health and manage risk in a clear and consistent way Based on standards like GAAP or IFRS accounting figures provide insights into a borrowers ability to pay their shortterm and longterm debts and manage their resources For example working capital shows shortterm financial health interest coverage measures if a borrower can pay interest on their debts and the debtequity ratio indicates how much debt a borrower has compared to their equity These measures help lenders act early if there are signs of financial trouble They also encourage responsible behaviour from borrowers by limiting risky actions like excessive borrowing or selling off assets which could affect their ability to repay loans Debt covenants are not completely reliable in preventing opportunistic behaviour Although they help reduce information gaps and agency costs several factors limit their effectiveness Managers might manipulate financial numbers like postponing expenses or rushing revenue to stay within covenant limits Loopholes such as provisions that allow exceptions to rules weaken enforcement Covenants primarily focus on financial numbers and may