A company borrows to buy more than its own money allows. Debt divided by a year's profit shows how many years of profit it would take to pay it all back.
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Borrowed money multiplies results. A good year makes the owners much richer; a bad year can wipe them out, because the loan still has to be paid whatever happens.
Two companies earn €20 a year. One owes €100 (5 years to repay from profit alone). One owes €300 (15 years). The second is far more fragile if profit drops.
High debt looks fine while profit is steady. The danger shows up exactly when profit falls, which is also when the company can least afford it.
A company's balance sheet lists its debt; its income statement shows yearly profit. Dividing one by the other takes a minute and says a lot.
Debt multiplies results both ways. Check how many years of profit it would take to repay.
Do it today
Debt ÷ a year’s profit for one company.
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