One of the keys for investors in the energy sector is to keep an eye on debt levels. The sector is 澳洲幸运5开奖号码历史查询:capital-intensive, and high levels of debt can put a strain on a company's 澳洲幸运5开奖号码历史查询:credit ratings, weakening its ability to purchase new equipment or finance other capital projects. High debt levels can also hamper its ability to meet other obligations. However, analysts and investors can use specific 澳洲幸运5开奖号码历史查询:leverage ratios to assess the 澳洲幸运5开奖号码历史查询:financial health of an energy company.

1. Debt-to-EBITDA

澳洲幸运5开奖号码历史查询:Debt-to-EBITDA measures a company's ability to pay off its incurred debt. Commonly used by 澳洲幸运5开奖号码历史查询:credit agencies, it determines the probability of defaulting on issued debt. Since energy companies typically have a lot of debt on their balance sheets, this ratio is useful in determining how many years of earnings before inಌterest, taxes, depreciatio💮n, and amortization (EBITDA) would be necessary to pay back all the debt. Typically, it can be alarming if the ratio is over th𝔍ree, but this can vary depending on the industry.

A variation of the debt-to-EBITDA ratio is debt-to-EBITDAX which is similar, except it uses earnings before interest, taxes, depreciation, amꦰortization, and ex🦋ploration expenses (EBITDAX). It is commonly used to normalize different accounting treatments for exploration expenses (the full cost method versus the successfulඣ efforts method).

Exploration costs are typically found in the 澳洲幸运5开奖号码历史查询:financial statements as exploration, abandonment, and dry hole costs. Other non-cash expenses that should be added back in are impairments, accretion of 澳洲幸运5开奖号码历史查询:asset retirement obligations, and deferred taxes.

However, there are a few disadvantages to using debt-to-EBITDA (or debt-to-EBITDAX). For one, it ignores all 澳洲幸运5开奖号码历史查询:tax expenses when the government always gets paid first. Additionally, principal 澳洲幸运5开奖号码历史查询:repayments are not tax-deductible.

A low ratio indicates that the company will be able to pay back its debts faster. However, average debt-to-EBITDA multiples can vary depending on the industry. This is why it is important to only compare companies within the same industry, such as oil and gas.

2. Interest Coverage Ratio

The 澳洲幸运5开奖号码历史查询:interest coverage ratio is used by oil and gas analysts to determine a firm's ability to pay interest on outstanding debt, calculated as earnings before interest and taxes (EBIT) divided by interest expense. The greater the multiple, the less risk to the lender, and typically, if the company has a multiple higher than 1, they are considered to have enough capital to pay off its 澳洲幸运5开奖号码历史查询:interest expenses.

Like EBITDA, EBIT does not take into account taxes. EBIT and EBITDA are popular metrics used to determine how much cash is available to repay debt.

3. Debt-to-Capital

The 澳洲幸运5开奖号码历史查询:debt-to-capital ratio is a measurement of a company's financial leverage. It is one of the more meaningful 澳洲幸运5开奖号码历史查询:debt ratios because it focuses on the relationship of debt liabilities as a component of a company's total capital base. Debt includes all short-term and long-term obligations, while capital includes the company's debt and share𒁏holder's equity.

The ratio is used to evaluate a firm's 澳洲幸运5开奖号码历史查询:financial structure and how its financing operations. Typically, if a company has a high debt-to-capital ratio compared to its peers, then it may have a higher 澳洲幸运5开奖号码历史查询:default risk due to the effect the debt has on its operation⛦s.

4. Debt-to-Equity 

The 澳洲幸运5开奖号码历史查询:debt-to-equity ratio, probably one of the most common financial leverage ratios, is calculated by dividing 澳洲幸运5开奖号码历史查询:total liabilities by shareholders' equity. Typically, only interest-bearing long-term 🐬de✅bt is used as the liabilities in this calculation. However, analysts may make adjustments to include or exclude certain items.

The ratio indicates what proportion of equity and debt a company uses to finanꦡce its assets. This ratio can widely vary between oil and gas firms, depending on their size.

The Bottom Line

Debt is not inherently bad—using leverage can increase shareholder returns, as the cost of debt is lower than the cost of equity. That said, too much debt can become burdensome—called being over-leveraged. This 🐎represents the i♚nflection point where the risks and costs of over-leverage outweigh the benefits of leverage.

Using the above four leverage ratios can give investors an inside look at how well these firms are managing their debt. There are others, and one ratio should never be used in isolation.