For investors trying to size up a specific company, it doesn't take an MBA, but it takes some digging and some arithmetic.
Debt, of course, is only one consideration when making investment decisions, but analysts crunch a variety of numbers to assess whether a company can handle its burden. Among them:
Total debt to total assets: Levels vary widely, so it needs to be compared with others in the same industry, but lower is better.
Total debt to EBITDA: Banks often look at earnings before interest, taxes, depreciation and amortization; loan deals frequently mandate that companies meet EBITDA standards. You want this figure to be below industry averages.
Times interest earned: A common measure of a firm's ability to service its debt, this is earnings divided by total interest cost. Earnings typically are represented by EBITDA or EBIT, which excludes the depreciation and amortization. In this case, higher is better.
Interest cost to cash flow: Often used by economists to assess overall corporate debt levels; aim lower. Nationally, it was running around 17 at the end of the first quarter, midway between recent extremes of more than 25 in the early 1990s and a little above 10 in the mid-1990s.
Debt as percent of net worth: Another benchmark; the Federal Reserve includes national figures in its massive quarterly Flow of Funds report. By the more conservative historical cost basis (as opposed to market value, which can reflect inflated asset values), the figure has been running at roughly 75 percent for the past several quarters. You can use the stockholders' equity line on the balance sheet for net worth. A lower number is better here.
Current ratio: This measures the company's ability to meet short-term funding needs - divide current assets by current liabilities. Higher is better, but analysts look for it to be at least 1. That only goes so far, though: In its last 10-Q before filing for bankruptcy, WorldCom's was exactly 1.
