Financial strength is a company's ability to pay its bills and its lenders, also in a bad year. Debt is not bad in itself - it can fund growth cheaply - but too much debt turns a temporary problem into a crisis, because interest and repayments must be paid whatever happens.
What to look at
Net debt (total debt minus cash) shows the real borrowing. Comparing net debt with yearly EBITDA shows roughly how many years of earnings it would take to repay it; a figure above about 3-4 deserves a closer look for most non-financial companies. The current ratio (current assets divided by current liabilities) shows whether short-term bills are covered.
Interest and refinancing
Check how easily operating profit covers interest costs and when large loans fall due. A company that must refinance a big loan when interest rates are high can see its profit drop even if the business is unchanged.
Different industries, different norms
Banks, utilities and property companies normally carry much more debt than software companies, so compare debt levels within the same sector.
This content is general information, not investment advice.