How do you evaluate a company's debt levels?

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by mazie , in category: Stocks and Equities , 10 months ago

How do you evaluate a company's debt levels?

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1 answer

by augustus.ziemann , 10 months ago

@mazie 

Evaluating a company's debt levels involves analyzing several financial ratios and indicators to assess the company's ability to manage its debt obligations. Here are some key methods for evaluating a company's debt levels:

  1. Debt-to-equity ratio: This ratio shows the proportion of debt in relation to equity and indicates the degree of financial leverage used by the company. A higher ratio signifies higher financial risk.
  2. Debt ratio: This ratio compares total debt to total assets, indicating the percentage of a company's assets financed by debt. A higher ratio suggests a higher degree of financial risk.
  3. Interest coverage ratio: It measures the company's ability to cover interest expenses using its operating earnings. A higher ratio indicates better debt-servicing capability.
  4. Debt service coverage ratio: It evaluates a company's ability to meet its debt obligations from its operating income. A ratio below 1 signifies an inability to meet debt repayments.
  5. Debt-to-EBITDA ratio: This ratio considers a company's earnings before interest, taxes, depreciation, and amortization (EBITDA), and measures the number of years it would take to repay debt based on EBITDA. A higher ratio suggests higher financial risk.
  6. Cash flow-to-debt ratio: This ratio represents the proportion of debt that a company can repay using its operating cash flow. A higher ratio indicates better debt sustainability.
  7. Credit rating: Review the credit rating assigned by reputed rating agencies such as Moody's or Standard & Poor's. Higher ratings imply lower credit risk.
  8. Industry comparison: Compare the company's debt levels to its industry peers to understand how it fares in relation to competitors.


It is important to note that evaluating a company's debt levels should include a comprehensive analysis of its overall financial health, business model, industry dynamics, and market conditions.