Debt magnifies returns in good times and accelerates failure in bad times. Buffett's 2008 chairman's letter — written from the wreckage of the financial crisis — captured the asymmetry: 'Leverage works both ways. If you're smart, you don't need it; if you're dumb, you have no business using it.

' Leverage ratios are the diagnostic tools that distinguish manageable debt from existential risk. Three ratios cover most of the territory; reading them together with industry context determines whether a company is in fortress, stretched, or distressed condition. Three core leverage ratios.

Debt-to-equity = Total Debt ÷ Equity. Below 0.5x is conservative; 1-2x moderate; above 3x aggressive (industry-dependent — utilities and banks routinely run higher).

Interest coverage = EBIT ÷ Interest Expense. Above 5x comfortable; below 2x dangerous; below 1x cannot pay interest from current operations. Net Debt-to-EBITDA = (Total Debt − Cash) ÷ EBITDA.