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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 ↓
§ 01
AAPL — Debt/Equity. Open AAPL on the Ledge to see current values.
§ 02
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
§ 03
Net Leverage = Net Debt / EBITDA
§ 04
Compare **Debt/Equity** for a utility company vs a tech company. Utilities typically use much more leverage.
§ 05

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.

§ 06
Net debt / EBITDA of 4.5x. For a regulated electric utility vs. a cyclical homebuilder — which case is more concerning?
Five questions · AI feedback

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:

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?
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