Key points for analyzing corporate debt and correctly interpreting the data.

May 2026 by Ana Carrisso

When an investor analyzes a company's debt, it's not enough to reduce everything to a single number. You need to understand both whether the company owes money and whether it can sustain that debt and remain viable over time. In this article, we will highlight the three most common financial indicators for analyzing indebtedness: The coverage ratio, the leverage ratio, and the working capital.

Coverage ratio

The coverage ratio measures a company's ability to pay the interest on its debt with the profits it generates. It is one of the benchmark measures for investors and creditors because it helps determine the risk involved in lending money to a company. It is calculated by dividing the operating cash flow by the total debt service (i.e., the total payments, both principal and interest, in a given period).

If a company earns ten million and pays two million in interest, its coverage ratio would be five. In other words, the profit covers five times the cost of the debt. Thus, the higher the ratio, the greater the ability to meet payments, providing a greater safety margin for investors and creditors.

Let's take as an example how a club in the First League operates. Revenue from television rights, sponsorship, or ticket sales would be equivalent to operating profit. The interest on the debt would be the payments the club has to make each season for the loans it used to finance player signings. If revenues comfortably cover these payments, the club has room to compete and plan for the long term. Otherwise, a bad season can cause problems. This was the case for Barcelona in 2021: The club's cost structure was so high and the drop in revenue due to the pandemic so severe that the club had no alternative but to let Lionel Messi, its main star, leave.

Leverage ratio

The leverage ratio, in turn, indicates the extent to which a company relies on debt for financing. In other words, it measures the relationship between debt and equity. Unlike the coverage ratio, the higher the leverage ratio, the greater the dependence on external financing. This is not necessarily negative: Many companies use debt to grow faster. The problem arises when the debt level becomes excessive relative to revenue.

Let's consider a company like EDP or Jerónimo Martins. These companies may take on debt to invest in new stores, energy infrastructure, or international expansion. If the revenue from these investments exceeds the cost of financing the debt, leverage acts as a lever that drives growth. But if revenues decline, that same leverage can amplify financial difficulties.

Working capital

The third key concept is working capital, also known as circulating capital or working capital. It serves to determine whether a company has sufficient resources to operate normally in the short term. To determine this, it is necessary to start with two basic concepts in the analysis of any balance sheet, which are assets (cash, inventory, merchandise, land, buildings, accounts receivable, etc.) and liabilities (credits and bank loans, payments to suppliers, salaries, taxes, etc.). Working capital is the difference between assets and liabilities; The resulting value refers to the amount the company can use as long-term financing or equity, and which it can draw upon if it has to repay all short-term debts. In other words, the larger the working capital or current assets, the greater the company's solvency.

Let's imagine that a catering service needs to buy ingredients, pay salaries, and settle invoices before receiving the month's sales. If you have enough cash or inventory to cover these expenses until the revenue comes in, your working capital is healthy. Otherwise, even a profitable business can suffer from liquidity stress.

For the individual investor, these three indicators offer valuable clues about a company's financial strength. The coverage ratio shows whether you can pay your interest, leverage reveals the extent to which you are dependent on debt, and working capital indicates whether you have the liquidity to maintain your day-to-day operations. Taken together, they help to understand whether debt is a tool for growth or a potential source of risk.