Net debt and its impact on company valuation
Understanding net debt separates successful investors from those who miss critical warning signs. For Indian investors analysing US stocks, this metric reveals a company's true financial health by showing what remains after accounting for available cash—a perspective gross debt alone cannot provide. With the Federal Reserve holding rates at 3.50%-3.75% as of January 2026 and corporate debt markets showing historically tight spreads, mastering net debt analysis has never been more essential.
Why net debt reveals what gross debt conceals
Net debt measures a company's actual debt burden by subtracting liquid assets from total borrowings. The formula is straightforward: Net Debt = Total Debt − Cash and Cash Equivalents. This calculation answers a fundamental question: if a company used all available cash to pay down debt immediately, how much would remain?
Consider two companies, each with $50 billion in debt. Company A holds $40 billion in cash, resulting in $10 billion in net debt. Company B has only $5 billion in cash, leaving $45 billion in net debt. Despite identical gross debt levels, their financial risk profiles differ significantly. Company A can comfortably meet its obligations, while Company B faces genuine leverage concerns.
Total debt includes short-term borrowings, long-term debt, the current portion of long-term debt, finance lease liabilities under ASC 842/IFRS 16, and convertible debt. Operating liabilities, such as accounts payable and deferred revenue, are excluded because they do not bear interest. Cash equivalents encompass bank deposits, money market funds, Treasury bills under 90 days' maturity, commercial paper, and marketable securities readily convertible to known cash amounts.
On US company balance sheets, find cash under "Cash and cash equivalents" in current assets. Debt appears as "Short-term borrowings," "Current portion of long-term debt," and "Long-term debt" in the liabilities section. Most 10-Q and 10-K filings include a debt schedule in the notes that details maturities and interest rates.
Calculating net debt with real company examples
The net debt calculation becomes concrete with actual 2025 data. Apple reported $133 billion in total cash and marketable securities against approximately $102 billion total debt, yielding a positive net cash position of $31 billion. This means Apple could theoretically eliminate all debt and still retain $31 billion in cash.
Conversely, AT&T carries $139.5 billion in total debt and only $20.3 billion in cash, resulting in $118.8 billion in net debt—a fundamentally different risk profile.
| Company | Total Cash/Securities | Total Debt | Net Debt Position |
|---|---|---|---|
| Apple | $133B | $102B | +$31B (net cash) |
| Alphabet | $98.5B | $27B | +$72B (net cash) |
| Tesla | $41.6B | $13.6B | +$28B (net cash) |
| Microsoft | $102B | $120B | -$18B (net debt) |
| AT&T | $20.3B | $139.5B | -$118.8B (net debt) |
| Verizon | ~$15B | $144B | ~$129B (net debt) |
Microsoft's figure includes substantial lease obligations under current accounting standards.
Common calculation mistakes include forgetting to include finance lease liabilities (critical for airlines and retailers, where leases rival traditional debt), excluding marketable securities from cash equivalents, and inconsistently treating restricted cash. Rating agencies like S&P and Moody's also factor in off-balance-sheet obligations, such as unfunded pensions and operating leases, which sophisticated investors should consider.
The critical role of cash positions in debt analysis
Cash holdings serve as a financial buffer against economic shocks, acquisition opportunities, and debt-servicing flexibility. Companies with substantial cash can refinance debt on favourable terms, weather revenue disruptions, and avoid dilutive equity raises during market downturns.
Big Tech's cash fortress demonstrates this advantage. Alphabet holds $98.5 billion in cash and marketable securities, generating more interest income than interest expense. Microsoft maintains $102 billion in liquid assets. These positions explain their pristine credit ratings—Apple and Microsoft both carry Moody's Aaa ratings, the highest possible.
Berkshire Hathaway epitomises cash strength, accumulating a record $382 billion by Q3 2025—more than Apple, Amazon, Alphabet, and Microsoft combined. Warren Buffett's successor, Greg Abel, calls this pile an "elephant gun" for transformational acquisitions. This cash hoard exceeds Berkshire's entire public equity portfolio of approximately $265 billion.
Cash position directly affects creditworthiness. Rating agencies view excess liquidity favourably, recognising that cash-rich companies can navigate refinancing challenges, fund operations during disruptions, and avoid covenant violations. In the current environment where market rates sit approximately 1.5 percentage points above the average rate companies pay on existing investment-grade bonds, strong cash positions provide crucial refinancing flexibility.
Net debt-to-EBITDA reflects the level of leverage.
The Net Debt/EBITDA ratio measures how many years a company would need to repay net debt using current earnings, assuming both remain constant. The formula divides Net Debt by EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation).
General benchmarks for all industries:
- Below 1.0x: Very low leverage, strong balance sheet
- 1.0x–2.0x: Conservative, healthy leverage
- 2.0x–3.0x: Moderate, manageable leverage
- 3.0x–4.0x: Elevated, requires monitoring
- Above 4.0x: High leverage, potential concern
- Above 6.0x: Severe leverage, distress territory
Credit rating agency thresholds vary by industry but follow general patterns:
| Rating Category | Typical Net Debt/EBITDA |
|---|---|
| AAA/Aaa | Under 1.0x |
| AA/Aa | 1.0x–2.0x |
| A | 2.0x–2.5x |
| BBB/Baa (investment grade floor) | 2.0x–3.5x |
| BB/Ba (high yield) | 3.5x–5.0x |
| B | 5.0x–6.5x |
The S&P 500 average net leverage stands at approximately 2.9x as of Q3 2025, flat year-over-year according to Barclays analysis. Industry variations matter significantly: utilities operate comfortably at 4.0x–5.5x due to regulated, predictable cash flows, while technology companies often carry negative ratios (net cash positions).
Net debt metrics complement other essential financial ratios that every investor should understand when analysing US stocks.
Apple's net debt/EBITDA ratio of approximately 0.31x reflects exceptional financial strength, while AT&T operates within its 2.5x target, the upper bound for investment-grade comfort.
Understanding gross debt versus net debt differences
Gross debt is total borrowings, excluding available cash. Net debt subtracts liquid assets to show the true debt burden. The distinction matters because two companies with identical gross debt can have vastly different risk profiles based on their cash positions.
When gross debt matters more:
- Assessing total interest obligations
- Evaluating covenant compliance (many covenants reference gross debt)
- Analysing refinancing needs and maturity schedules
- Understanding capital structure for M&A scenarios
When net debt provides better insight:
- Comparing leverage across companies with different cash levels
- Calculating enterprise value for valuation purposes
- Assessing true financial flexibility
- Evaluating the ability to deleverage quickly
Consider the technology sector. Apple carries approximately $102 billion in gross debt—substantial by most standards. Yet with $133 billion in cash and marketable securities, Apple maintains a net cash position of $31 billion. Analysing only gross debt would miss this financial strength entirely.
Telecommunications presents the opposite pattern. AT&T's $139.5 billion in gross debt and Verizon's $144 billion in gross debt both appear concerning. Their limited cash positions of $20 billion and $15 billion, respectively, mean that net debt nearly equals gross debt—there is no cash cushion.
How net debt transforms enterprise value calculations
Enterprise Value (EV) represents the total price to acquire a company—what an acquirer would pay to own all operations. The formula adds market capitalisation to total debt minus cash (equivalently: Market Cap + Net Debt).
Debt is added because an acquirer assumes responsibility for existing debt obligations. Cash is subtracted because the acquirer inherits it, effectively reducing the purchase price. This framework enables comparing companies across different capital structures.
When net debt is negative (net cash position), EV falls below market cap. Tesla's September 2021 example: $730 billion market cap + $9.4 billion debt − $16.2 billion cash = $723 billion EV—lower than market cap because of the net cash position. Acquirers would effectively receive $6.8 billion in "change."
Current EV calculations (January 2026 estimates):
- Apple: Market cap ~$3.5 trillion + $102B debt − $133B cash = EV approximately $3.47 trillion
- AT&T: Market cap ~$175B + $139.5B debt − $20.3B cash = EV approximately $294 billion
This affects valuation multiples significantly. EV/EBITDA enables apples-to-apples comparison regardless of capital structure. A company with high net debt appears more expensive on EV/EBITDA than market cap alone would suggest. Net cash companies look cheaper on EV-based metrics. Meta trades at approximately 18.7x EV/EBITDA (second lowest among Magnificent 7), partly reflecting its net cash position.
Assessing leverage through multiple metrics
Beyond Net Debt/EBITDA, several complementary metrics reveal leverage quality.
Interest Coverage Ratio (EBIT/Interest Expense) indicates the ability to service debt from operating profits. Below 2.0x indicates difficulty covering interest; below 1.5x signals potential distress. S&P 500 average EBITDA coverage runs 11x–14x, providing a substantial cushion. Approximately 80-90% of loan covenants include ICR tests, typically requiring a minimum of 3.0x.
Net Debt/Equity measures debt relative to shareholder investment. Higher ratios indicate greater financial leverage and risk. Technology companies often show low or negative ratios due to net cash positions and accumulated earnings.
Net Debt/Total Capital indicates the percentage of permanent financing that comes from debt. Investment-grade companies typically maintain ratios below 50%, though capital-intensive industries operate at high levels.
Warning signs of excessive leverage:
- Rising leverage with declining EBITDA represents passive deterioration—companies becoming more leveraged without taking on new debt
- Shrinking covenant headroom precedes violations—if covenants require a maximum 4.0x leverage and a company operates at 3.8x, minimal margin for error exists.
- Maturity concentration creates refinancing crises—companies with significant debt maturing within 12-24 months without adequate liquidity face existential ris.k
- The refinancing wall shows $3 trillion in corporate debt maturities expected by 2026, up from $2 trillion in 2024
Tracking debt reduction trajectory
Companies successfully reducing debt create shareholder value through improved credit ratings, lower interest costs, and enhanced financial flexibility.
Anheuser-Busch InBev exemplifies organic deleveraging. After the SABMiller acquisition pushed leverage to 4.8x during the pandemic peak (2020), the company executed systematic debt reduction: 4.0x (2021) → 3.6x (2022) → 3.4x (2023) → 2.89x (December 2024)—first time below 3.0x since 2015.
Methods included EBITDA growth (+8.2% in 2024 to $21 billion), free cash flow generation ($11.3 billion in 2024, up $2.5 billion year-over-year), bond repurchases ($9 billion), and capex discipline. Results delivered an S&P upgrade to A- from BBB+, a 22% dividend increase, and a $6 billion share buyback announced in October 2025.
AT&T reduced net debt from peak levels exceeding $170 billion post-Time Warner acquisition to $119.1 billion by Q1 2025, reaching its 2.5x leverage target. Key moves included the sale of the DIRECTV stake to TPG ($5.4 billion in proceeds), structured real estate transactions ($850 million), and consistent free cash flow generation ($16+ billion annual target). The company initiated a $10 billion share buyback in mid-2025 while maintaining dividends.
Tesla's transformation stands out. Debt-to-equity collapsed from 55.7% (2020) to approximately 7% (Q3 2025). Total debt fell from $11.7 billion to roughly $8.2 billion while cash surged to $41.6 billion, creating a $33+ billion net cash position. Interest coverage improved from 2.54x to 26.69x—a company fundamentally de-risked.
Industry-specific leverage norms vary dramatically.
Different sectors tolerate different leverage levels based on cash flow predictability, capital intensity, and regulatory structures.
Technology companies typically maintain net cash positions or minimal leverage (debt/EBITDA under 0.5x). High profit margins (20-30%+), asset-light models, and substantial recurring revenue generate excess cash. NVIDIA's debt/EBITDA sits at just 0.08x. Global tech debt issuance reached a record $428.3 billion in 2025, primarily funding AI infrastructure.
Telecommunications operates at 2.5x–3.5x Net Debt/EBITDA due to enormous capital requirements. Spectrum auctions cost billions (Verizon spent $45+ billion on C-band spectrum alone); 5G network buildouts require $17-24 billion in annual capex per major carrier; and fibre expansion demands continuous investment. However, predictable subscription revenue supports this leverage.
Utilities sustain 4.0x–5.5x leverage due to regulated returns and infrastructure mandates. Regulators approve rate increases covering debt service costs, making high leverage sustainable.
Healthcare/Pharmaceuticals average 1.5x–1.8x, though M&A drives significant variation. The sector shifted from predominantly A-rated to over one-third BBB-rated as companies leverage up for acquisitions.
The current market environment shapes leverage decisions.
The January 2026 credit landscape presents a nuanced picture. The Federal Reserve held rates at 3.50%-3.75% at its January meeting after three consecutive cuts totalling 75 basis points in late 2025. Investment-grade corporate spreads tightened to 78 basis points—in the 2nd percentile over 20 years (historically tight).
High-yield spreads compressed to 270 basis points, well below the 4.9% twenty-year average. These tight spreads mean limited compensation for credit risk. Corporate America capitalised on favourable conditions: 2025 investment-grade issuance reached $1.82 trillion (up 25% from 2024), with 2026 potentially hitting $2.0-2.25 trillion—a record.
Rating trends favour borrowers: upgrades exceeded downgrades by approximately 3:1 in 2025. Moody's expects high-yield default rates to rise above 4% by Q1 2026 but remain below the 4.5% historical average.
However, risks accumulate. Companies that borrowed at 3-4% rates now face refinancing costs nearly double. "Zombie companies"—where interest costs exceed income—represent a growing concern, and distressed exchanges constitute approximately two-thirds of defaults.
Practical application for Indian investors in the US markets
For Indian investors analysing U.S. stocks, net debt analysis provides an edge in several ways.
Screen for financial strength by identifying companies with net cash positions or low leverage. The technology sector (Apple, Alphabet, Meta, Microsoft, Tesla) offers numerous examples of companies whose fortress balance sheets provide downside protection and strategic flexibility.
Assess relative value using EV-based multiples. Companies with high net debt appear more expensive on EV/EBITDA than P/E suggests, while net cash companies may be undervalued on P/E relative to EV/EBITDA. Always verify whether you are comparing companies on equivalent metrics.
Evaluate dividend sustainability by examining leverage alongside payout ratios. AT&T's 50% payout ratio, combined with 2.5x leverage and guidance of $ 1.18 billion in free cash flow, suggests dividend safety. A company with similar leverage but weaker cash generation faces dividend risk.
Monitor deleveraging trajectories to identify improving situations. Companies that actively reduce debt may see credit upgrades, lower interest costs, and expanded capital return programs—all of which support stock appreciation.
Net debt analysis identifies balance sheet quality that quarterly earnings alone miss.
For a comprehensive approach to evaluating stocks, explore this guide to fundamental analysis tools for Indian investors.
Companies that delever successfully—such as AB InBev, which reduced leverage from 4.8x to 2.89x—often reward shareholders with rating upgrades, buybacks, and dividend growth. Those with deteriorating metrics face the opposite trajectory. The difference between these outcomes lies in the analysis you conduct before investing.
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage companies, and not of Winvesta. We advise investors to check with certified experts before making any investment decisions.
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Table of Contents
Understanding net debt separates successful investors from those who miss critical warning signs. For Indian investors analysing US stocks, this metric reveals a company's true financial health by showing what remains after accounting for available cash—a perspective gross debt alone cannot provide. With the Federal Reserve holding rates at 3.50%-3.75% as of January 2026 and corporate debt markets showing historically tight spreads, mastering net debt analysis has never been more essential.
Why net debt reveals what gross debt conceals
Net debt measures a company's actual debt burden by subtracting liquid assets from total borrowings. The formula is straightforward: Net Debt = Total Debt − Cash and Cash Equivalents. This calculation answers a fundamental question: if a company used all available cash to pay down debt immediately, how much would remain?
Consider two companies, each with $50 billion in debt. Company A holds $40 billion in cash, resulting in $10 billion in net debt. Company B has only $5 billion in cash, leaving $45 billion in net debt. Despite identical gross debt levels, their financial risk profiles differ significantly. Company A can comfortably meet its obligations, while Company B faces genuine leverage concerns.
Total debt includes short-term borrowings, long-term debt, the current portion of long-term debt, finance lease liabilities under ASC 842/IFRS 16, and convertible debt. Operating liabilities, such as accounts payable and deferred revenue, are excluded because they do not bear interest. Cash equivalents encompass bank deposits, money market funds, Treasury bills under 90 days' maturity, commercial paper, and marketable securities readily convertible to known cash amounts.
On US company balance sheets, find cash under "Cash and cash equivalents" in current assets. Debt appears as "Short-term borrowings," "Current portion of long-term debt," and "Long-term debt" in the liabilities section. Most 10-Q and 10-K filings include a debt schedule in the notes that details maturities and interest rates.
Calculating net debt with real company examples
The net debt calculation becomes concrete with actual 2025 data. Apple reported $133 billion in total cash and marketable securities against approximately $102 billion total debt, yielding a positive net cash position of $31 billion. This means Apple could theoretically eliminate all debt and still retain $31 billion in cash.
Conversely, AT&T carries $139.5 billion in total debt and only $20.3 billion in cash, resulting in $118.8 billion in net debt—a fundamentally different risk profile.
| Company | Total Cash/Securities | Total Debt | Net Debt Position |
|---|---|---|---|
| Apple | $133B | $102B | +$31B (net cash) |
| Alphabet | $98.5B | $27B | +$72B (net cash) |
| Tesla | $41.6B | $13.6B | +$28B (net cash) |
| Microsoft | $102B | $120B | -$18B (net debt) |
| AT&T | $20.3B | $139.5B | -$118.8B (net debt) |
| Verizon | ~$15B | $144B | ~$129B (net debt) |
Microsoft's figure includes substantial lease obligations under current accounting standards.
Common calculation mistakes include forgetting to include finance lease liabilities (critical for airlines and retailers, where leases rival traditional debt), excluding marketable securities from cash equivalents, and inconsistently treating restricted cash. Rating agencies like S&P and Moody's also factor in off-balance-sheet obligations, such as unfunded pensions and operating leases, which sophisticated investors should consider.
The critical role of cash positions in debt analysis
Cash holdings serve as a financial buffer against economic shocks, acquisition opportunities, and debt-servicing flexibility. Companies with substantial cash can refinance debt on favourable terms, weather revenue disruptions, and avoid dilutive equity raises during market downturns.
Big Tech's cash fortress demonstrates this advantage. Alphabet holds $98.5 billion in cash and marketable securities, generating more interest income than interest expense. Microsoft maintains $102 billion in liquid assets. These positions explain their pristine credit ratings—Apple and Microsoft both carry Moody's Aaa ratings, the highest possible.
Berkshire Hathaway epitomises cash strength, accumulating a record $382 billion by Q3 2025—more than Apple, Amazon, Alphabet, and Microsoft combined. Warren Buffett's successor, Greg Abel, calls this pile an "elephant gun" for transformational acquisitions. This cash hoard exceeds Berkshire's entire public equity portfolio of approximately $265 billion.
Cash position directly affects creditworthiness. Rating agencies view excess liquidity favourably, recognising that cash-rich companies can navigate refinancing challenges, fund operations during disruptions, and avoid covenant violations. In the current environment where market rates sit approximately 1.5 percentage points above the average rate companies pay on existing investment-grade bonds, strong cash positions provide crucial refinancing flexibility.
Net debt-to-EBITDA reflects the level of leverage.
The Net Debt/EBITDA ratio measures how many years a company would need to repay net debt using current earnings, assuming both remain constant. The formula divides Net Debt by EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation).
General benchmarks for all industries:
- Below 1.0x: Very low leverage, strong balance sheet
- 1.0x–2.0x: Conservative, healthy leverage
- 2.0x–3.0x: Moderate, manageable leverage
- 3.0x–4.0x: Elevated, requires monitoring
- Above 4.0x: High leverage, potential concern
- Above 6.0x: Severe leverage, distress territory
Credit rating agency thresholds vary by industry but follow general patterns:
| Rating Category | Typical Net Debt/EBITDA |
|---|---|
| AAA/Aaa | Under 1.0x |
| AA/Aa | 1.0x–2.0x |
| A | 2.0x–2.5x |
| BBB/Baa (investment grade floor) | 2.0x–3.5x |
| BB/Ba (high yield) | 3.5x–5.0x |
| B | 5.0x–6.5x |
The S&P 500 average net leverage stands at approximately 2.9x as of Q3 2025, flat year-over-year according to Barclays analysis. Industry variations matter significantly: utilities operate comfortably at 4.0x–5.5x due to regulated, predictable cash flows, while technology companies often carry negative ratios (net cash positions).
Net debt metrics complement other essential financial ratios that every investor should understand when analysing US stocks.
Apple's net debt/EBITDA ratio of approximately 0.31x reflects exceptional financial strength, while AT&T operates within its 2.5x target, the upper bound for investment-grade comfort.
Understanding gross debt versus net debt differences
Gross debt is total borrowings, excluding available cash. Net debt subtracts liquid assets to show the true debt burden. The distinction matters because two companies with identical gross debt can have vastly different risk profiles based on their cash positions.
When gross debt matters more:
- Assessing total interest obligations
- Evaluating covenant compliance (many covenants reference gross debt)
- Analysing refinancing needs and maturity schedules
- Understanding capital structure for M&A scenarios
When net debt provides better insight:
- Comparing leverage across companies with different cash levels
- Calculating enterprise value for valuation purposes
- Assessing true financial flexibility
- Evaluating the ability to deleverage quickly
Consider the technology sector. Apple carries approximately $102 billion in gross debt—substantial by most standards. Yet with $133 billion in cash and marketable securities, Apple maintains a net cash position of $31 billion. Analysing only gross debt would miss this financial strength entirely.
Telecommunications presents the opposite pattern. AT&T's $139.5 billion in gross debt and Verizon's $144 billion in gross debt both appear concerning. Their limited cash positions of $20 billion and $15 billion, respectively, mean that net debt nearly equals gross debt—there is no cash cushion.
How net debt transforms enterprise value calculations
Enterprise Value (EV) represents the total price to acquire a company—what an acquirer would pay to own all operations. The formula adds market capitalisation to total debt minus cash (equivalently: Market Cap + Net Debt).
Debt is added because an acquirer assumes responsibility for existing debt obligations. Cash is subtracted because the acquirer inherits it, effectively reducing the purchase price. This framework enables comparing companies across different capital structures.
When net debt is negative (net cash position), EV falls below market cap. Tesla's September 2021 example: $730 billion market cap + $9.4 billion debt − $16.2 billion cash = $723 billion EV—lower than market cap because of the net cash position. Acquirers would effectively receive $6.8 billion in "change."
Current EV calculations (January 2026 estimates):
- Apple: Market cap ~$3.5 trillion + $102B debt − $133B cash = EV approximately $3.47 trillion
- AT&T: Market cap ~$175B + $139.5B debt − $20.3B cash = EV approximately $294 billion
This affects valuation multiples significantly. EV/EBITDA enables apples-to-apples comparison regardless of capital structure. A company with high net debt appears more expensive on EV/EBITDA than market cap alone would suggest. Net cash companies look cheaper on EV-based metrics. Meta trades at approximately 18.7x EV/EBITDA (second lowest among Magnificent 7), partly reflecting its net cash position.
Assessing leverage through multiple metrics
Beyond Net Debt/EBITDA, several complementary metrics reveal leverage quality.
Interest Coverage Ratio (EBIT/Interest Expense) indicates the ability to service debt from operating profits. Below 2.0x indicates difficulty covering interest; below 1.5x signals potential distress. S&P 500 average EBITDA coverage runs 11x–14x, providing a substantial cushion. Approximately 80-90% of loan covenants include ICR tests, typically requiring a minimum of 3.0x.
Net Debt/Equity measures debt relative to shareholder investment. Higher ratios indicate greater financial leverage and risk. Technology companies often show low or negative ratios due to net cash positions and accumulated earnings.
Net Debt/Total Capital indicates the percentage of permanent financing that comes from debt. Investment-grade companies typically maintain ratios below 50%, though capital-intensive industries operate at high levels.
Warning signs of excessive leverage:
- Rising leverage with declining EBITDA represents passive deterioration—companies becoming more leveraged without taking on new debt
- Shrinking covenant headroom precedes violations—if covenants require a maximum 4.0x leverage and a company operates at 3.8x, minimal margin for error exists.
- Maturity concentration creates refinancing crises—companies with significant debt maturing within 12-24 months without adequate liquidity face existential ris.k
- The refinancing wall shows $3 trillion in corporate debt maturities expected by 2026, up from $2 trillion in 2024
Tracking debt reduction trajectory
Companies successfully reducing debt create shareholder value through improved credit ratings, lower interest costs, and enhanced financial flexibility.
Anheuser-Busch InBev exemplifies organic deleveraging. After the SABMiller acquisition pushed leverage to 4.8x during the pandemic peak (2020), the company executed systematic debt reduction: 4.0x (2021) → 3.6x (2022) → 3.4x (2023) → 2.89x (December 2024)—first time below 3.0x since 2015.
Methods included EBITDA growth (+8.2% in 2024 to $21 billion), free cash flow generation ($11.3 billion in 2024, up $2.5 billion year-over-year), bond repurchases ($9 billion), and capex discipline. Results delivered an S&P upgrade to A- from BBB+, a 22% dividend increase, and a $6 billion share buyback announced in October 2025.
AT&T reduced net debt from peak levels exceeding $170 billion post-Time Warner acquisition to $119.1 billion by Q1 2025, reaching its 2.5x leverage target. Key moves included the sale of the DIRECTV stake to TPG ($5.4 billion in proceeds), structured real estate transactions ($850 million), and consistent free cash flow generation ($16+ billion annual target). The company initiated a $10 billion share buyback in mid-2025 while maintaining dividends.
Tesla's transformation stands out. Debt-to-equity collapsed from 55.7% (2020) to approximately 7% (Q3 2025). Total debt fell from $11.7 billion to roughly $8.2 billion while cash surged to $41.6 billion, creating a $33+ billion net cash position. Interest coverage improved from 2.54x to 26.69x—a company fundamentally de-risked.
Industry-specific leverage norms vary dramatically.
Different sectors tolerate different leverage levels based on cash flow predictability, capital intensity, and regulatory structures.
Technology companies typically maintain net cash positions or minimal leverage (debt/EBITDA under 0.5x). High profit margins (20-30%+), asset-light models, and substantial recurring revenue generate excess cash. NVIDIA's debt/EBITDA sits at just 0.08x. Global tech debt issuance reached a record $428.3 billion in 2025, primarily funding AI infrastructure.
Telecommunications operates at 2.5x–3.5x Net Debt/EBITDA due to enormous capital requirements. Spectrum auctions cost billions (Verizon spent $45+ billion on C-band spectrum alone); 5G network buildouts require $17-24 billion in annual capex per major carrier; and fibre expansion demands continuous investment. However, predictable subscription revenue supports this leverage.
Utilities sustain 4.0x–5.5x leverage due to regulated returns and infrastructure mandates. Regulators approve rate increases covering debt service costs, making high leverage sustainable.
Healthcare/Pharmaceuticals average 1.5x–1.8x, though M&A drives significant variation. The sector shifted from predominantly A-rated to over one-third BBB-rated as companies leverage up for acquisitions.
The current market environment shapes leverage decisions.
The January 2026 credit landscape presents a nuanced picture. The Federal Reserve held rates at 3.50%-3.75% at its January meeting after three consecutive cuts totalling 75 basis points in late 2025. Investment-grade corporate spreads tightened to 78 basis points—in the 2nd percentile over 20 years (historically tight).
High-yield spreads compressed to 270 basis points, well below the 4.9% twenty-year average. These tight spreads mean limited compensation for credit risk. Corporate America capitalised on favourable conditions: 2025 investment-grade issuance reached $1.82 trillion (up 25% from 2024), with 2026 potentially hitting $2.0-2.25 trillion—a record.
Rating trends favour borrowers: upgrades exceeded downgrades by approximately 3:1 in 2025. Moody's expects high-yield default rates to rise above 4% by Q1 2026 but remain below the 4.5% historical average.
However, risks accumulate. Companies that borrowed at 3-4% rates now face refinancing costs nearly double. "Zombie companies"—where interest costs exceed income—represent a growing concern, and distressed exchanges constitute approximately two-thirds of defaults.
Practical application for Indian investors in the US markets
For Indian investors analysing U.S. stocks, net debt analysis provides an edge in several ways.
Screen for financial strength by identifying companies with net cash positions or low leverage. The technology sector (Apple, Alphabet, Meta, Microsoft, Tesla) offers numerous examples of companies whose fortress balance sheets provide downside protection and strategic flexibility.
Assess relative value using EV-based multiples. Companies with high net debt appear more expensive on EV/EBITDA than P/E suggests, while net cash companies may be undervalued on P/E relative to EV/EBITDA. Always verify whether you are comparing companies on equivalent metrics.
Evaluate dividend sustainability by examining leverage alongside payout ratios. AT&T's 50% payout ratio, combined with 2.5x leverage and guidance of $ 1.18 billion in free cash flow, suggests dividend safety. A company with similar leverage but weaker cash generation faces dividend risk.
Monitor deleveraging trajectories to identify improving situations. Companies that actively reduce debt may see credit upgrades, lower interest costs, and expanded capital return programs—all of which support stock appreciation.
Net debt analysis identifies balance sheet quality that quarterly earnings alone miss.
For a comprehensive approach to evaluating stocks, explore this guide to fundamental analysis tools for Indian investors.
Companies that delever successfully—such as AB InBev, which reduced leverage from 4.8x to 2.89x—often reward shareholders with rating upgrades, buybacks, and dividend growth. Those with deteriorating metrics face the opposite trajectory. The difference between these outcomes lies in the analysis you conduct before investing.
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage companies, and not of Winvesta. We advise investors to check with certified experts before making any investment decisions.
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Invest in 11,000+ US stocks & ETFs
