Track 1 · Lesson 6 · 7 min
Equity, debt and staying power
What a company owns and owes, and why debt decides who survives a downturn. Stress-test real companies.
A balance sheet is a snapshot of what a company owns and owes. It always balances: assets = liabilities + equity. Assets are what it owns (cash, buildings, inventory, the cars in a rental fleet). Liabilities are what it owes (loans, bonds, bills). Equity is what's left for shareholders.
If debts exceed assets, equity is negative: on paper, shareholders own less than nothing. Hertz had negative equity in its latest filing.
Why debt matters. Borrowing lets a company grow faster, but interest must be paid in good years and bad, and loans must be repaid or refinanced when they come due. In a downturn, profits fall but the debt doesn't. Shareholders absorb the whole difference.
Try it
Stress-test a company
Real debt, cash, market value and operating profit from the latest filings. Banks are left out: borrowing is their business.
Try Hertz, then Nvidia. With heavy debt, a modest markdown of the business wipes out most of the stock. With net cash, the stock falls less than the business.
Checkpoint
A business is worth $10B and has $9B of debt. If the business is marked down 10%, roughly what happens to the stock?
The business falls to $9B, exactly the debt, leaving shareholders about nothing: from $1B to roughly zero.
Four numbers to check. Debt to equity: above about 1.5× is heavy. Net debt to EBITDA: years of operating cash earnings to pay off debt; above 4× is stretched. Interest cover: operating profit ÷ interest; under 2× is fragile. Current ratio: short-term assets ÷ short-term bills; under 1 means it relies on new money.
Every stock page shows these in its crash card, and Debt decides who survives a crash ranks every covered stock. For the full story of how debt turned a revenue dip into an 85% fall, read the Hertz lesson.
Check yourself