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L.5 · BEGINNER · 2 MIN

Leverage Ratios: How Much Debt Is Too Much?

Leverage ratios measure how much debt a company uses and whether it can handle that burden. Debt amplifies returns when things go well and accelerates collapse when they do not.

Quiz · 5 questions ↓

Live data

AAPL — Debt/Equity. Open AAPL on the Ledge to see current values.

Compare

RatioFormulaWhat It Means
Debt/EquityTotal Debt / EquityHow much borrowed vs owned capital
Net LeverageNet Debt / EBITDAYears of earnings needed to repay debt
Interest CoverageEBIT / Interest ExpenseHow easily earnings cover debt payments

Formula

Net Leverage = Net Debt / EBITDA

Chart

Try it

Compare **Debt/Equity** for a utility company vs a tech company. Utilities typically use much more leverage.

Key insight

There is no universal right amount of debt. The question is whether the business generates enough stable cash flow to service it comfortably across economic cycles.

Check-in

Net debt / EBITDA of 4.5x. For a regulated electric utility vs. a cyclical homebuilder — which case is more concerning?
Check your understanding

Sit with the ideas.

A company has $10B of total debt, $2B of cash, and $4B of annual EBITDA. What is its net leverage ratio?

Why:
Continue this lesson in the appAdaptive practice · saves your progress · remediation when you miss

Other lessons in this course.

  1. 01Profitability Ratios: How Much Does the Company Keep?
  2. 02Return on Equity: Shareholder Efficiency
  3. 03ROIC: The Truth About Business Quality
  4. 04Liquidity Ratios: Can They Pay Their Bills?
  5. 05Leverage Ratios: How Much Debt Is Too Much?— reading now
  6. 06Efficiency Ratios: How Well Does Management Run the Business?
  7. 07Cash Conversion Cycle: Who Funds Whom?
Continue this lesson in the app →See it on a real ticker →