LESSON 4.6 · CORE

Debt: gearing, interest cover, covenants

How much of the business belongs to lenders before it belongs to you.

READING A COMPANY4 MIN READ

Lenders are paid before shareholders, every time. Net debt is borrowings minus cash: what the company would still owe if it emptied its bank account. Gearing compares that debt with shareholders' equity, and interest cover asks how many times over profit covers the interest bill — the lower it gets, the less room for a bad year. A credit rating is an agency's grade of how likely the company is to pay its lenders back. Loans also come with covenants, limits such as a maximum debt-to-profit ratio, and a company close to breaking one may cut its dividend to protect its lenders.

A holding's detail shows two debt figures. Net Debt / EBITDA is worked out by the app from the provider's debt, cash and EBITDA figures, and reads as roughly how many years of EBITDA — a rough measure of operating cash profit — it would take to clear the debt. Debt/Equity is the provider's total borrowing divided by shareholders' equity. Neither covers interest cover, covenants or credit ratings; for those, go to the company's annual report.

£900m borrowings£150m cash£750m net debt

Against £250m of EBITDA that's 3×. Whether that's comfortable depends on how steady the business is.

Check a holding's Net Debt / EBITDA →

Educational content only. It is not personal financial advice.