A company's debt is a problem when its earnings or cash flow are too small, or are shrinking too quickly, to cover both what it owes and what it costs to service that debt. Three measures are used to judge this: how much net debt it carries relative to its earnings or cash flow, how that debt compares with shareholders' equity, and how many times its operating earnings or cash flow cover its interest expense.
How net debt and leverage are worked out
Net debt is a company's total debt, meaning its borrowings, bonds and lease obligations, minus the cash and short-term investments it holds. A company sitting on large cash reserves can have net debt well below its gross borrowings; one with little cash has net debt close to its total debt. Leverage then sets net debt, or sometimes gross debt, against a base. The debt to equity ratio divides total debt by shareholders' equity, showing how much of the balance sheet is funded by debt rather than equity capital. Net debt to EBITDA divides net debt by earnings before interest, tax, depreciation and amortisation; the result is often read as the number of years of current earnings it would take to repay net debt, assuming none of it is refinanced and all of it goes toward repayment.
Interest cover
The interest coverage ratio divides operating earnings, or sometimes operating cash flow, by interest expense for the same period. A ratio of several times covers interest with room to spare; a ratio close to one means operating earnings or cash flow barely cover the interest bill, leaving little margin if earnings fall or rates rise. Analysts differ on which numerator to use: operating income and operating cash flow can diverge when depreciation, working-capital movements or one-off items separate reported earnings from cash actually generated, so the two versions of the ratio do not always move together.
When leverage matters most: how much debt is too much
Leverage and coverage ratios matter most when they are moving in the wrong direction, not when they are static. Rising rates increase the interest cost of debt that must be refinanced, so a company rolling over maturing bonds at a higher rate pays more interest on the same amount of debt, which lowers interest cover even without any change in total borrowing. Falling cash flow or earnings works from the other side: the denominator of a coverage or net-debt ratio shrinks while the debt itself has not changed. There is no fixed line for how much debt is too much; what counts as manageable depends on how stable a company's earnings are, how its debt is scheduled to mature, and how easily it can refinance when that happens.
What AT&T's recent results show about the earnings side of these ratios
AT&T's trailing-12-month figures to the third quarter of fiscal 2026 illustrate why the choice of earnings or cash flow as a denominator changes what a leverage or coverage ratio shows, even without the debt side of the calculation. Net income fell 41.0% over the year to $13.1 billion, while free cash flow fell 10.7% to $17.8 billion. AT&T's net margin was 10.2% over the same period, and its free cash flow margin was 13.8%, down 2.2 percentage points year on year. Operating margin, a measure closer to the earnings base typically used for interest cover, was 18.3%.
If AT&T's interest expense had stayed level over the year, a coverage ratio built on net income would have moved by more than one built on free cash flow, because the two denominators fell by markedly different amounts over the same twelve months. That difference is the practical reason analysts check both an earnings-based and a cash-flow-based version of a coverage ratio before drawing conclusions from either alone.
This article does not include AT&T's reported debt balance, cash position or interest expense, so it cannot calculate AT&T's actual net debt, debt to equity ratio, net debt to EBITDA or interest coverage ratio; it shows only the earnings and cash-flow trend such ratios are built from, which limits how far this example can be read without AT&T's complete debt schedule and interest costs.
What it means for value
Financing costs feed into valuation models through the discount rate applied to future cash flows. In Fundamentalytics' model, raising the discount rate by one percentage point would lower AT&T's modelled per-share value by -23.6%, using the current trailing cash-flow base. This illustrates why a higher required return, whether reflecting perceived refinancing risk or a general rise in rates, affects a company's modelled value independently of its reported earnings. These are model values under stated assumptions, not a comparison with the share price.
Where to see these figures
AT&T's quarterly cash flow, margin and earnings figures referenced here, along with its full filing history, are set out on its full company page.
