65-Day Academy · Day 18 · Fundamentals
Debt — the Amplifier
What debt does
Debt amplifies everything: it boosts returns in good times (leverage on equity) and annihilates them in bad times (fixed interest regardless of profit). The equity holder is last in line — every dollar of debt sits AHEAD of your claim. Two identical businesses, one levered 3×, will show wildly different shareholder outcomes across a cycle.
The measures
Net debt/EBITDA: the workhorse — below ~1.5× comfortable, 2–3× watchful, 4×+ fragile (rate hikes or a revenue dip can spiral). Interest coverage: EBIT ÷ interest — below ~3× means a modest profit dip threatens the dividend. Also read the MATURITY wall: $2B due next year at today's rates can be an existential refinancing event.
Net cash — the offensive weapon
Negative net debt (net cash) does the opposite of leverage: it lets a company survive downturns, buy back stock at the bottom, and acquire distressed competitors. Net-cash compounders are rare and deserve premium multiples — the balance sheet IS part of the moat.
What you'll practise
A company has EBITDA $500M, total debt $1,800M, cash $300M. What is Net Debt/EBITDA?
15 XP in the app · intermediate
Sources
- Net DebtInvestopedia
- Interest Coverage RatioInvestopedia
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All lessons are for educational purposes only and are not individualized financial advice, a recommendation, or a solicitation to buy or sell any security. Options involve substantial risk and are not suitable for every investor.