Lesson 7 of 8
The cushion, measured three ways
Net debt to earnings, operating cash flow to debt and debt to equity on the same filing, why the three disagree, and which question each of them answers.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Net debt to earnings measures how many years of earnings the debt represents; operating cash flow to debt measures how fast it could be repaid; debt to equity measures the cushion under it.
- The three use different denominators from different statements, so they routinely disagree, and the disagreement is informative.
- Only the second uses cash, which makes it the one that changes when earnings quality changes.
Three standard leverage measures, computed on the same filing, give three different impressions. That is not a defect to resolve by picking a favourite.
Three leverage measures on one filing
- Net debt to EBITDA · 8,754 / 18,1220.48x
- Operating cash flow to debt · 17,525 / 18,3960.95x
- Debt to equity · 18,396 / 54,1650.34x
The three, and their denominators
Net debt to earnings before interest, tax, depreciation and amortisation. Total debt less cash, over that earnings measure. At the filing above: 18,396 million dollars of debt less 9,642 million of cash is 8,754 million, over EBITDA of 18,122 million, which is 0.48 times. It answers how many years of that earnings measure the net debt represents.
Operating cash flow to debt. The cash the business generated over the total borrowed: 17,525 million over 18,396 million, or 0.95 times. It answers how quickly the debt could be repaid out of cash if everything generated went to repaying it, which nothing ever does.
Debt to equity. Borrowings over book equity: 18,396 million over 54,165 million, or 0.34 times. It answers how much book value stands beneath the debt, which is what a creditor is looking at.
Why they disagree
Because the denominators come from three different places and move for three different reasons.
Book equity is a balance built up from retained earnings and issuance and reduced by buybacks. It can move a long way in a year when a company repurchases stock, with no change in borrowing at all, which the thesis course flags as the reason a plain debt-to-equity threshold makes a poor leverage condition.
An earnings measure moves with the cycle, so a leverage ratio using one is worst at the trough and best at the peak, which is the opposite of when leverage actually matters. The cyclical peak caution that the product prints beside several multiples applies here.
Cash generation moves with both earnings and working capital, so it can diverge from earnings for a year or two in either direction.
Which to use
The one whose denominator answers your question. If the question is about a dated obligation, none of the three answers it and the maturity schedule does. If it is about how fast borrowings could be repaid from the business, the second one is the only one built from cash. If it is about what stands beneath the debt for a creditor, the third.
And compute all three anyway, because the disagreement is the finding. The next lesson is about what to do when two of them, written as conditions, point in opposite directions at the same time.
Check yourself
Which of the three measures is built from cash?
- Net debt to EBITDA
- Operating cash flow to debt
- Debt to equity
Show the answer
Answer: B.
That is why it is the one that moves when earnings quality changes, and why it roughly doubled at the filer above while debt to equity barely moved.Why is a leverage ratio using an earnings measure misleading on a cyclical business?
- Because earnings are audited annually
- Because it looks best at the peak and worst at the trough, which is the opposite of when leverage matters
- Because EBITDA excludes interest
Show the answer
Answer: B.
The same caution the product prints beside several cyclical multiples applies to leverage measured against a cyclical earnings figure.Debt rose 14 percent while debt to equity fell from 0.36 to 0.34. How?
- Cash increased
- Equity grew faster than debt did, so the ratio fell despite more borrowing
- The earnings measure changed
Show the answer
Answer: B.
Book equity is a balance that moves with retained earnings, issuance and buybacks, which is why a plain debt-to-equity threshold makes a poor condition on its own.Sources
- Micron Technology, Inc., annual reports on Form 10-K for the fiscal years ended 29 August 2024, accession 0000723125-24-000027, filed 4 October 2024, and 28 August 2025, accession 0000723125-25-000028, filed 3 October 2025, for debt, cash, equity, operating cash flow and EBITDA.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- EBITDA is not a figure defined by the accounting standards and different sources compute it differently. The value used here is the one the product stores for that filing.
- Operating cash flow to debt describes a hypothetical in which all cash generated goes to repaying debt, which no company does. It is a speed measure, not a plan.
- Nothing here is a view on Micron or on any security.