Intermediate · Lesson 4 of 9

Balance sheet strength and debt

7 minute read · By Krishna Avadhani, Vestora Academy · Updated 18 October 2026

Debt can boost returns in good times and sink a company in bad times. Key measures: debt-to-equity (total debt / equity), net debt to EBITDA (how many years of earnings to repay debt), interest cover (EBIT / interest expense) and the current ratio (current assets / current liabilities).

Rough guides used by many analysts: net debt/EBITDA below about 2-3x is comfortable for most industries; interest cover below about 3x is a warning; a current ratio below 1 means short-term bills exceed short-term assets. Utilities and property trusts normally carry more debt because their cash flows are steadier.

Also check when debt must be repaid (maturity profile). A company that must refinance a large loan during a credit crunch can be forced to raise equity cheaply, diluting shareholders.

Formula

Interest cover = EBIT / Interest expense
Net debt / EBITDA = (Debt - Cash) / EBITDA
Current ratio = Current assets / Current liabilities

Key takeaways

Net debt/EBITDA and interest cover show if debt is manageable.
Acceptable debt depends on how stable the cash flows are.
Watch debt maturities; refinancing risk causes dilution.

Check your understanding

1. EBIT is $50m and interest expense is $25m. Interest cover is...

0.5x
2x
25x
75x

Show the answer

2x. 50 / 25 = 2x, which is thin.

2. Why can utilities carry more debt than miners?

They pay no tax
Their cash flows are steadier
They have no assets
Debt is cheaper by law

Show the answer

Their cash flows are steadier. Regulated, steady cash flows support higher borrowing.

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General education only, not financial advice. Examples are illustrations. Rules, tax settings and products change; check official sources.