Net Debt to EBITDA
Net Debt to EBITDA
Net debt divided by EBITDA: roughly how many years of operating cash earnings it would take to repay the debt net of cash. The most common leverage covenant in loan agreements and credit analysis.
When to use: Use to gauge how much debt a business can carry relative to its earnings power. Rating agencies and lenders set thresholds on it; below 2x is generally comfortable, above 4x is stretched for most industries.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| NetDebtEBITDA | Net Debt / EBITDA | Years of EBITDA needed to repay net debt | integer |
| TotalDebt | Total Debt | Short-term + long-term interest-bearing debt | $ |
| Cash | Cash, Equivalents & Marketable Securities | Cash plus marketable securities | $ |
| EBITDA | EBITDA | Earnings before interest, taxes, depreciation, and amortization | $ |
Real-Life Examples
Example 1: Moderate Leverage
Total debt $800M, cash $250M, EBITDA $220M.
Given
Step-by-Step
2.5x is investment-grade territory for a stable business: two and a half years of EBITDA would clear the net debt.
Example 2: Stretched Balance Sheet
Total debt $1,500M, cash $100M, EBITDA $350M.
Given
Step-by-Step
At 4x the company is near the level where covenants tighten and refinancing gets expensive. A 25% drop in EBITDA would push it above 5x.
Frequently Asked Questions
The ratio is meaningless: there are no earnings to repay debt from. The formula returns an error rather than a misleading negative multiple.
EBITDA approximates cash earnings before financing and non-cash charges, which is what is available to service debt. Net income is after interest, so using it would count the debt cost twice.