In every major S&P industry sector except utilities, there is a negative relationship between leverage (defined as net debt divided by earnings before interest, taxes, depreciation and amortization) and return on equity. The higher the debt, the worse the business.

In the chart above and charts below, I show the relationship between leverage and profitability for the most important S&P sectors. The charts below plot return on equity on the vertical axis against leverage on the horizontal axis. The trend line in every case slopes downward, which simply means that higher leverage, in general, corresponds to lower returns on equity.

Read more: The limits of leverage, continued

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