Balance-sheet risk: net debt, interest cover and the current ratio

A company rarely fails because it is unprofitable for a year. It fails because it cannot pay what it owes when it falls due. That makes the balance sheet the part of a company's accounts where small numbers carry the largest consequences. Our comparison pages summarise balance-sheet risk with three measures — net debt to EBITDA, interest coverage and the current ratio — and use them for the balance-sheet factor of the score. This guide explains each one, shows the range across the companies we cover, and is candid about what they miss.

Net debt to EBITDA: how many years to repay

Net debt is total borrowings minus cash. EBITDA is operating profit plus depreciation and amortisation — a rough measure of the cash the operations produce before interest and tax. Dividing one by the other gives the number of years of current operating cash it would take to repay the debt, if every dollar went to lenders.

As a rough guide, under one times is light, two to three times is normal for a stable business, and above three times deserves attention — more so if earnings are volatile. Among the companies we cover:

A negative figure means the company holds more cash than debt — net cash. Palantir reports no borrowings at all.

Pfizer stands out at the top. It borrowed heavily to buy other drug companies, and with earnings under pressure its debt now stands at 4.61 times EBITDA, while its operating profit covers interest only 2.56 times. That is manageable for a company of its size and cash generation, but it leaves less room than the drug giants it is often compared with — Eli Lilly's debt is 1.26 times EBITDA with interest covered 38.54 times. See Eli Lilly vs Pfizer.

Interest coverage: can profits pay the interest?

Interest coverage divides operating profit by interest expense. Coverage of ten times means the company earns ten dollars of operating profit for every dollar of interest. Below about three times, a bad year can leave interest payments uncovered. At the other extreme, Micron's coverage was 937.17 times and Nvidia's 425.82 — interest is a rounding error for them.

Intel's coverage of −0.07 times is the warning sign in the table: with operating profit slightly negative, its operations did not cover interest at all over the period. Intel holds $12.87bn of cash against $50.54bn of debt, and it is spending heavily on new factories. Its balance sheet is not in danger on these figures, but it has less margin for error than any other large chipmaker we cover — compare AMD vs Intel.

In our scoring, interest coverage is capped at 30 times, so a company with almost no debt cannot win the balance-sheet factor on an absurd ratio alone; a company with no debt at all is scored at the cap.

The current ratio: next year's bills

The current ratio divides current assets — cash, receivables and inventory that turn into cash within a year — by current liabilities, the bills due within a year. Above one means short-term assets cover short-term obligations.

A ratio below one is not automatically a problem. Disney (0.71), Uber (0.84) and PepsiCo (0.94) all run below one, for sound reasons: their customers pay them before they pay their own suppliers, so the business is partly funded by the cash in transit. For a company with weaker, less predictable cash flow, the same ratio would be a concern. Very high ratios — Palantir at 7.23, Shopify at 5.35, Nvidia at 4.59 — usually mean large cash balances relative to short-term obligations: safe, but sometimes a sign of capital the company has no immediate use for.

What our balance-sheet numbers miss

These three measures are a summary, and we want you to know where they fall short:

1. Our "cash" is cash and cash equivalents only. Apple, Alphabet, Microsoft and Nvidia hold much of their liquidity in marketable securities, which our figure leaves out, so their net debt looks higher on our pages than it effectively is. We would rather understate a company's cash than count an investment portfolio as instantly available.
2. Some figures are deliberately missing. Ford and General Motors borrow heavily through their car-finance arms, under accounting labels our reader does not attribute to total debt. Rather than call them debt-free, we show no net-debt figure for either. Apple's filings carry no separately tagged interest expense that we can read, so its coverage is blank too.
3. Maturity and rates are not in the ratios. Ten billion dollars of debt due next year at a floating rate is far riskier than the same amount due in twenty years at a fixed one. Only the debt note in the annual report shows this; how to read a 10-K explains where to find it.
4. Off-balance-sheet obligations — leases, pension deficits, purchase commitments — can matter as much as borrowings for some companies.

Banks are a separate case entirely. Their deposits are borrowings in a technical sense but raw material in a business sense, so none of these three measures applies; how to compare bank stocks explains what does.

How the factor is scored

Our balance-sheet factor blends the three measures: net debt to EBITDA counts against a company at twice its value, the current ratio counts for it, and capped interest coverage adds a little more. If any input is missing for either company, the factor is not scored rather than guessed, and the winner must lead by at least 3% of the larger blended figure. The full rules are in the six-factor score explained.

Coca-Cola against PepsiCo shows the blend at work: Coca-Cola wins on lower net debt (2.14 times against 2.54) and a higher current ratio (1.36 against 0.94), despite PepsiCo's better interest coverage. As with every factor, the useful question is not who wins but by how much — and whether the difference matters for the kind of investor you are. A balance sheet only becomes the deciding factor when a business hits trouble; the time to check it is before then.