Why Debt Matters
Debt amplifies returns (good and bad) and creates bankruptcy risk. Understanding a companys debt load is essential for risk assessment.
Key Debt Metrics
Debt-to-Equity Ratio
Total Debt / Shareholders Equity. Higher ratios mean more leverage. Industry context matters - utilities often have higher D/E than tech.
Debt-to-EBITDA
Total Debt / EBITDA. Shows how many years of earnings needed to pay off debt. Under 3x is generally healthy; over 5x is concerning.
Interest Coverage Ratio
EBIT / Interest Expense. Shows ability to pay interest. Below 2x signals stress; above 5x is comfortable.
Debt Quality Analysis
- Maturity schedule - When is debt due?
- Fixed vs floating rate - Interest rate risk
- Secured vs unsecured - Collateral protection
- Covenants - Restrictions on company actions
Credit Ratings
Agencies like S&P and Moodys rate corporate debt:
- Investment grade - BBB/Baa and above
- High yield (junk) - BB/Ba and below