Two companies can owe exactly the same amount and be in completely different positions. A water utility with $2 billion of debt and customers who pay every month is usually fine. A fashion retailer with the same debt and a bad Christmas may not be. Reading a company balance sheet means comparing what a business owes with what it earns, how easily it pays the interest and when the money falls due, and in October 2026, with US 10-year Treasury yields above 5%, those questions carry a lot more weight than they did a few years ago.
Quick answer: A company has too much debt when its earnings and cash flow can’t comfortably cover the interest and repayments. The main checks are net debt, debt-to-EBITDA, interest coverage and the maturity schedule. The same debt level can be safe for a stable business and dangerous for one with volatile earnings.
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Where Debt Appears on a Company Balance Sheet
The balance sheet lists what a company owns, what it owes and what’s left for shareholders on a single date. The SEC’s beginner’s guide to financial statements explains each section.
- Current liabilities: debts due within the next 12 months, including short-term borrowing and the part of long-term debt that falls due this year
- Long-term debt: bonds and loans due after more than a year
- Lease liabilities: long-term commitments for buildings, aircraft or equipment, which work much like debt
- Cash and short-term investments: listed under assets, and used to work out net debt
Four Ways to Measure Company Debt
Net Debt
Net debt is total debt minus cash. A company with $2 billion of borrowing and $500 million in the bank has net debt of $1.5 billion. It gives a fairer picture than gross debt, as long as the cash is free to use and isn’t tied up overseas or set aside for something else.
Debt-to-EBITDA
Debt-to-EBITDA divides net debt by a year’s earnings before interest, tax, depreciation and amortization. It tells you roughly how many years of operating earnings it would take to pay the debt off.
| Debt-to-EBITDA | What it often suggests |
|---|---|
| Under 2x | Comfortable for most businesses |
| 2x to 4x | Manageable, depending on how stable earnings are |
| Above 4x | Heavily indebted, with less room if profits fall |
These ranges are rough guides. Utilities and property companies often carry more debt because their income is steady, while a technology or mining company with the same ratio would look stretched.
Interest Coverage
Interest coverage divides operating profit by interest costs. A company earning $700 million in operating profit and paying $100 million in interest has coverage of 7x. Under about 2x, a small dip in profit can leave a company struggling to pay its lenders.
Maturity Schedule
The notes to the accounts usually show when each bond or loan falls due. A company with $1.5 billion maturing next year has to repay it or refinance it at today’s rates, and with 10-year Treasury yields above 5% in October 2026, debt that cost 3% a few years ago could cost far more to roll over. Our article on bond yields and stocks explains why that’s weighing on indebted companies.
The Same Debt Can Carry Very Different Risk
Here are two made-up companies, each with $2 billion of net debt and paying 5% interest.
| Utility Co | Retail Co | |
|---|---|---|
| Net debt | $2 billion | $2 billion |
| EBITDA | $1 billion | $400 million |
| Debt-to-EBITDA | 2x | 5x |
| Operating profit | $700 million | $250 million |
| Annual interest | $100 million | $100 million |
| Interest coverage | 7x | 2.5x |
| Debt due next year | $200 million | $1.5 billion |
| How steady are earnings? | Very steady, regulated prices | Seasonal and tied to consumer spending |
Utility Co could see profit fall by half and still cover its interest more than three times. Retail Co has to refinance three-quarters of its debt next year, and a 30% drop in profit would leave interest coverage under 2x. On the headline number, they owe the same. On every measure that counts, Retail Co is far more exposed.
What Makes the Same Debt Safer or Riskier
- Earnings stability: steady, predictable income can support far more debt than profits that swing with the economy
- Fixed or floating rates: fixed-rate debt protects a company when rates rise, while floating-rate loans reprice quickly
- Currency: borrowing in dollars while earning in another currency adds risk when the dollar strengthens
- Asset backing: debt secured on buildings or infrastructure is often cheaper and easier to refinance
- Free cash flow: cash left after investment is what repays debt, and our article on free cash flow vs net profit shows why profit alone can mislead
Warning Signs on a Company Balance Sheet
- Debt rising faster than earnings for several years
- Interest coverage falling toward 2x or lower
- A large share of debt due within the next two years
- A dividend or buyback paid for with new borrowing
- Credit rating downgrades or warnings from rating agencies
Heavy debt is one of the most common reasons a stock looks cheap and stays that way, which our guide to value traps looks at in more detail. Debt also shows up in valuation measures like EV/EBITDA, covered in our guide to judging if a company is cheap.
Frequently Asked Questions
What is a good debt-to-EBITDA ratio?
A debt-to-EBITDA ratio under 2x is generally comfortable, between 2x and 4x is manageable for many businesses, and above 4x points to heavy borrowing. The right level depends on the industry. Utilities and property companies often carry higher ratios safely, while companies with volatile profits need lower ones.
What is a good interest coverage ratio?
An interest coverage ratio above 4x or 5x is usually seen as comfortable, because operating profit could fall a long way before interest payments became a problem. Under about 2x, even a small drop in earnings can make it hard to pay lenders, and rating agencies and investors tend to treat the company as higher risk.
How do you calculate net debt?
Net debt is calculated by adding a company’s short-term and long-term borrowing and subtracting its cash and short-term investments. Both figures are on the balance sheet. For example, a company with $3 billion of debt and $800 million of cash has net debt of $2.2 billion.
Why does the same debt level affect companies differently?
The same debt level affects companies differently because the real test is how easily they can pay it. A business with steady earnings, fixed-rate debt and repayments spread over many years can carry far more than one with volatile profits, floating-rate loans and a big repayment due soon.
