Learn · 5 min
Debt: the three ratios you need
Debt / equity, net debt / EBITDA and interest coverage: what they measure and the usual thresholds.
Net debt / EBITDA
How many years of operating earnings (before depreciation) would it take to repay debt net of cash? Below 2 is generally comfortable; above 4 becomes heavy for most sectors.
Interest coverage
Operating income divided by interest expense. Below 1.5, the company struggles to pay its interest; above 8 to 10, the debt burden is light.
Debt / equity
The share funded by lenders relative to shareholders. Careful: heavy share buybacks can make equity very small or even negative without the company being fragile. That is why this ratio is never read alone.
Banks and insurers run with structurally high leverage: these ratios do not apply to them in the same way.