← Glossary · Financial ratios
Debt ratio (leverage)
How large a company's debt is relative to its equity or earnings.
The debt ratio relates debt to equity or operating earnings. A common measure is net debt divided by EBITDA: a value of 3 means the company would need about three years of earnings to repay its debt.
Debt is not bad in itself, but it makes a company more vulnerable when business weakens or interest rates rise. High and growing debt is one of the warning signs of a value trap.
