Leverage ratios help us compare a company's level of debt relative to some other item And give us an idea of whether a company has too much debt and whether it can handle it The first one to look at here is your classic leverage ratio: debt over equity Or an alternative is debt over debt plus equity And that looks at the debt funding relative to owner funding If the level of debt was too high, we would be worried by the leveraged effect here Debt has a leverage effect in that it exaggerates returns to equity holders. If returns are good it will exaggerate them up If returns are bad i.e. a loss making company, it will exaggerate them down, it will worsen them So if we have too much debt, that exaggeration effect can be very worrying for equity holders and can make returns highly volatile Next up, we have total debt divided by EBIT and a very common alternative to this is net debt divided by EBITDA. This looks at the company's ability to service debt If we think of EBITDA a bit like cash available to pay off your debt Then this figure would give us a number of years it would take to pay off my debt Let's say my total debt was 20 and my EBITDA was 4, then I've got an idea that this would take me about 5 years to pay it off That would be pretty high Next up we have interest coverage: EBITDA over interest expense And this shows us a company's ability to service its interest If the EBITDA here was 4 and interest expense was 1? That would be okay We could pay our interest four times over, I wouldn't be getting too worried But if your EBITDA was 2 and your interest expense 1? I could only cover my interest expense twice, I'd be starting to worry And if my EBITDA was 1.1 and my interest expense was 1? I would definitely start worrying about the company's ability to service its interest A good example here is Pertobas; Moody's downgraded their debt to junk status When their total debt divided by EBITDA in 2014 reached 5.1 This was seen as too must debt and they were very worried about the company's ability to service that debt