Net Debt to EBITDA
IntermediateNet debt to EBITDA is a company's net debt divided by its annual EBITDA. It shows roughly how many years of earnings before interest, taxes, depreciation and amortization it would take to repay its debt.
This ratio is one of the most common measures of leverage used by lenders, credit rating agencies and investors. It relates the amount a company owes, after subtracting cash, to its ability to generate operating earnings.
For example, a company with net debt of 800,000 and EBITDA of 400,000 has a net debt to EBITDA ratio of 2.0. In theory, it would take about two years of EBITDA to repay its net debt, ignoring interest, taxes and investment needs.
Lower ratios generally indicate less risk. A ratio below about 2 or 3 is often seen as comfortable for many industries, while ratios above about 4 or 5 may be considered high. Acceptable levels vary with the stability of a company's cash flows; utilities and infrastructure businesses often carry higher ratios than cyclical companies.
Loan agreements frequently include covenants that limit net debt to EBITDA, and breaching them can trigger penalties or early repayment.
The ratio has limitations. EBITDA ignores capital spending, working capital and taxes, so it can overstate the cash truly available for debt repayment.
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