Lesson 1.5 · 5 of 5 · What a stock is worth
Company debt: how much is too much and how to measure it
Debt is too high when the company’s profit and cash can no longer carry it comfortably through a bad year. You measure it with net debt, with net debt to EBITDA (how many years of operating profit before depreciation it would take to repay) and with interest cover (how many times profit pays the interest bill).
Terms in this lesson
- Net debt
- The company's financial debt minus the cash it holds.
- Debt / EBITDA
- How many years the company would need to pay off its debt from operating profit.
- Interest coverage
- How many times operating profit covers the interest due.
- EBITDA
- Operating profit before interest, tax, depreciation and amortization.
Opening question
Company A has debts of $10 billion and company B of $1 billion. Which is more heavily indebted?
$10 billion of debt can be modest for a company with $8 billion in the bank and $5 billion of operating profit a year. $1 billion can be a lot for a company that barely makes a profit. Debt is judged against cash and profit.
It does not matter if you get it wrong: trying first helps you remember.
What net debt is
Definition
How is it calculated?
Borrowings minus cash and investments that are easy to sell.
Net debt shows what would still be owed if the company used all its cash to pay off its loans. Coca-Cola at 31 December 2025: loans and bonds of $45.5 billion; cash, short-term investments and marketable securities of $15.8 billion. Net debt: $29.7 billion. Some analysts deduct only cash and short-term investments and would get $31.6 billion (leaving out $1.9 billion of securities), so always check what has been deducted.
Coca-Cola’s net debt: $29.7 bn, at 31 December 2025.
Myth or fact?
“Negative net debt is a bad sign.”
Myth. Negative net debt means the company holds more cash than debt: it could repay all its loans tomorrow. That is a comfortable position, not a problem.
Net debt to EBITDA: how many years of profit
Definition
What does the ratio show?
How many years of EBITDA it would take to repay net debt.
EBITDA is operating profit with depreciation and amortisation added back: the accounting cost of buildings, equipment and other long-term assets, which does not leave the bank account that year. At Coca-Cola in 2025: 13.76 + 1.05 = $14.81 billion. Net debt / EBITDA = 29.69 ÷ 14.81 = 2.0. There is no fixed limit: a company with steady sales can carry more debt than a cyclical one. As a yardstick, US bank regulators wrote in 2013 that total debt above 6 times EBITDA raises concern for most industries.
Work it out
A company has borrowings of $900 million and cash of $150 million. Operating profit is $200 million and depreciation and amortisation $50 million. What is its net debt to EBITDA?
A hint
Net debt = borrowings - cash. EBITDA = operating profit + depreciation and amortisation.
Net debt: 900 - 150 = $750 million. EBITDA: 200 + 50 = $250 million. 750 ÷ 250 = 3.0. It would take three years of EBITDA to repay the net debt, before interest, tax and investment.
Interest cover: can the company pay its interest?
Definition
How is it calculated?
Operating profit ÷ interest expense.
Interest cover shows how many times operating profit covers the year’s interest. Coca-Cola in 2025: 13.76 ÷ 1.65 = 8.3 times. The closer the figure gets to 1, the less room the company has: at 1, all of its operating profit goes on interest, and a small dip in sales puts it in difficulty.
Work it out
A company has operating profit of $120 million and interest expense of $48 million. How many times is its interest covered?
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Create a free accountCheck yourself
All of a company’s debt is on a floating rate. The rate rises from 3% to 6% and operating profit stays the same. What happens to interest cover?
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What is wrong with this reasoning?
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Create a free accountReal case
Coca-Cola’s debt in 2025
The figures come from Coca-Cola’s full-year 2025 results. The analysis page shows the same ratios over several years, so you can see whether debt is rising or falling against profit.
Why bank debt is read differently
Watch out
Why not use debt to EBITDA for a bank?
For a bank, debt is the raw material.
Customers’ deposits are, in the accounts, money the bank owes. The bank lends them on, so its debts are many times larger than its equity, and that is normal. The real risk lies elsewhere: losing the money it has lent, or watching its deposits leave all at once. In March 2023, customers pulled more than $40 billion out of Silicon Valley Bank in a single day, and the bank was closed the next day.
The highest-quality capital, measured against risk-weighted assets. Regulators set a minimum.
The share of loans no longer being repaid on time. The higher it is, the more losses can grow.
Lots of small deposits from households and businesses leave more slowly than large sums borrowed on the markets.
Myth or fact?
“A bank whose debts are ten times its equity is close to going bust.”
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Create a free accountWhat would you do?
You own shares in a company with net debt of 4.5 times EBITDA, and interest rates across the economy are rising. What do you do?
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Create a free accountWhat you learned
- Net debt = borrowings minus cash and easily sold investments; it is judged against profit, never on its own.
- Net debt to EBITDA shows how many years of EBITDA repayment would take; interest cover shows how easily the company pays its interest.
- Banks are read through capital, loan quality and deposit stability, not debt to EBITDA.
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Save your progress with a free accountLessons are educational. They are not a recommendation to buy or sell. Investing involves risk and you can lose money. Sources: Coca-Cola, full-year 2025 results (10 February 2026, SEC): operating income $13,762 million, depreciation and amortisation $1,050 million, interest expense $1,654 million, borrowings $1,551 + $1,822 + $42,119 million, cash $10,270 million, short-term investments $3,602 million, marketable securities $1,934 million; Interagency Guidance on Leveraged Lending (Federal Reserve, OCC, FDIC, March 2013); Michael Barr, Federal Reserve, testimony to Congress on Silicon Valley Bank, 28 March 2023.