Net Debt to EBITDA
Ratio of net debt to EBITDA, measuring financial leverage and debt sustainability
What is Net Debt to EBITDA?
Net debt to EBITDA compares a company's debt, after subtracting cash, with its annual earnings before interest, tax, depreciation and amortisation. It shows roughly how many years of earnings it would take to repay the debt.
It is one of the most common measures of financial leverage, used by lenders and investors.
How this KPI is measured
- Function
- Finance
- Sub-function
- Treasury
- Industry
- All Industries
- Type
- Lagging
- Impact
- Risk
- Unit
- x
- Measurement frequency
- Quarterly / Annual
- Formula
- (Total debt − Cash) / EBITDA
How to calculate it
Subtract cash from total debt, and divide by EBITDA.
For example, with debt of 50,000,000, cash of 10,000,000 and EBITDA of 16,000,000, the ratio is (50,000,000 - 10,000,000) / 16,000,000 = 2.5.
A lower figure means less leverage. Acceptable levels depend on the industry and stability of earnings, and lenders often set limits.
Where it is used
Assessing leverage
See debt relative to earnings.
Meeting covenants
Stay within lender limits.
Planning capital structure
Decide on borrowing.
How to improve it
Tips and common mistakes
- Cyclical businesses need lower leverage.
- EBITDA ignores capital spending and tax.
- Consider lease obligations.
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