Debt to equity ratio
Total debt ÷ shareholders’ equity. A result of 1.50 means $1.50 of debt for each $1.00 of reported equity.
Leverage Calculators
Quick Answer
What Does the Leverage and Coverage Calculator Measure?
The Leverage and Coverage Calculator helps investors assess how heavily a company relies on debt and whether its earnings can comfortably cover its interest costs. It calculates the debt-to-equity ratio to compare debt with shareholder equity and the interest coverage ratio to evaluate the company’s ability to meet interest payments. These results can help users compare financial risk, borrowing capacity and balance-sheet strength across companies.
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Leverage & Coverage Studio
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Debt To Equity Ratio
Shows How Much Debt A Company Uses To Finance Assets Relative To Equity.
Visuals
Charts Are Illustrative And Not Investment Advice.
Pinned Comparisons
How to use the leverage calculators
Leverage can increase shareholder returns when business performance is strong, but it also increases fixed obligations and downside risk. This studio calculates debt to equity and interest coverage so you can examine both the amount of debt financing and the company’s ability to service its interest expense.
Use figures from the same reporting period. Debt should include interest bearing borrowings that are relevant to the analysis, equity should represent common shareholders’ equity, and operating profit should match the period covered by interest expense.
Interest coverage ratio
EBIT ÷ interest expense. A result of 4.0 means operating profit covers annual interest four times.
A worked leverage example
Example company
A company reports $6 million of interest bearing debt, $4 million of common equity, $1.2 million of earnings before interest and tax, and $300,000 of annual interest expense.
- Debt to equity: $6 million ÷ $4 million = 1.50.
- Interest coverage: $1.2 million ÷ $300,000 = 4.0 times.
The figures describe different parts of risk. Debt to equity measures the capital structure at a point in time. Interest coverage measures whether current operating earnings provide room to meet an ongoing financing cost.
How to interpret leverage in context
| Situation | Possible meaning | Check before concluding |
|---|---|---|
| High debt to equity | The company relies heavily on creditor funding. | Cash flow stability, asset quality, maturities and borrowing terms. |
| Low debt to equity | The balance sheet may have more financial flexibility. | Whether management is underinvesting or holding excess capital. |
| High interest coverage | Operating earnings provide a larger buffer over interest expense. | Whether current EBIT is cyclical or contains unusual gains. |
| Falling coverage | Debt servicing capacity may be weakening. | Temporary investment, higher rates, lower margins or declining demand. |
There is no universal safe ratio. Utilities and infrastructure companies may carry more debt because cash flows are relatively predictable. Early stage or cyclical companies may need a larger buffer because revenue and earnings can change quickly.
Important items the simple ratios miss
- Lease liabilities, guarantees and other obligations that may behave like debt.
- Debt maturity dates and whether refinancing is likely to be expensive.
- Fixed versus floating interest rates and exposure to rate changes.
- Debt covenants that restrict dividends, borrowing or business decisions.
- Cash held in restricted accounts or jurisdictions where it is difficult to access.
Common leverage analysis mistakes
- Using total liabilities as total debt without checking what the liabilities contain.
- Ignoring negative equity, which makes debt to equity difficult to interpret.
- Using EBITDA instead of EBIT without clearly changing the coverage definition.
- Judging a cyclical company from one unusually strong year.
- Assuming current interest expense reflects the cost of future refinancing.
Where to find the inputs
Debt and equity appear on the balance sheet, while EBIT and interest expense appear on the income statement or in the notes. The debt note provides maturity and rate information that the ratios cannot show. Verify US company data in SEC EDGAR and compare financial strength with the StockEducation US stock screener.
Leverage calculator questions
What is a good debt to equity ratio?
It depends on the industry, cash flow stability and accounting equity. Compare with close peers, the company’s history and its debt terms.
Can interest coverage be negative?
Yes. When EBIT is negative, the company is not covering interest from operating profit for that period, and the usual multiple is not economically meaningful.
Should cash be subtracted from debt?
Net debt can be useful, but only when cash is genuinely available. Review restricted cash and operational cash needs before netting the full balance.
