When Toys R Us liquidated in 2018 — around 800 stores and 33,000 jobs gone — the easy story was ‘Amazon killed it.’ The real killer was on its own balance sheet. The company was still selling billions of dollars of toys. It simply couldn’t afford the ~$400 million a year in interest bolted on during a buyout it never asked for. It’s the clearest lesson there is in how the return on a business gets decided by how you finance it.
The Math
In 2005, private-equity firms KKR and Bain Capital, plus property firm Vornado, bought Toys R Us for $6.6 billion. Only about $1.6 billion was their own equity — the other $5 billion-plus was borrowed money loaded straight onto the company’s books.
That’s the leveraged-buyout play: use debt to juice the return on a thin slice of equity. It can work brilliantly — if the business throws off enough cash to service the debt and still invest in itself.
The leverage trap, in numbers
ROI = (gain − cost) ÷ cost. Leverage flatters ROI on the way up, because you control a huge asset with a little equity. But interest is a fixed cost that never sleeps. That ~$400m a year flowed to lenders instead of into e-commerce, store refits or lower prices. A perfectly profitable operating business was slowly starved by its own capital structure — and when sales softened, there was no cushion left. It filed for bankruptcy in September 2017 with about $5bn of debt still on the books. Tellingly, the sponsors reportedly collected around $464 million in fees and interest along the way: the ‘return’ landed with the financiers, not the business.
The Nuance
Debt isn’t the villain — borrowing to buy something that earns more than the interest is exactly how strong ROI gets built. The danger is leverage so heavy that the interest devours the very cash you need to stay competitive. Toys R Us didn’t have a demand problem; it had a financing problem. The return the buyout promised was real. It just went to lenders and sponsors instead of into the company’s future.Does the Return Still Beat the Cost of Borrowing?
Enter what you invest and expect to earn to see your ROI and annualised return — then sanity-check it against the interest you’d be paying. Free, private, no sign-up.
Check your ROI →💬 Your turn
A — I always stress-test debt against a bad year.
B — I tend to plan for the good scenario.
Drop A or B — and what’s a brand you loved that vanished for reasons that had nothing to do with the product?
- The big investment firms that lost $1.3 billion in the Toys R Us bankruptcy — Forbes
- Toys R Us bankrupt, but don’t blame Amazon — Fortune
- Bain, KKR, Vornado suffer wipeout in Toys R Us bankruptcy — Bloomberg
- How KKR, Bain and Vornado rewarded themselves for adding debt — PE Stakeholder Project
— Maya, who has never once regretted paying cash for a toy.