Net debt/EBITDA ratio

Category:Ratios
Alternative names: Net debt/EBITDA net debt to EBITDA ratio

What is Net debt/EBITDA ratio

The net debt to EBITDA is leverage ratio that measures the company’s ability to pay down its debt. The ratio calculates how much from the earnings is available for paying out the company debt (less the cash and cash equivalents). In other words the Net debt/EBITDA ratio measures how many years will it take for a company to repay all of its debt from EBITDA earnings.

How to calculate Net debt/EBITDA (formula)

The formula for calculating Net debt/EBITDA ratio is:

Net debt/EBITDA ratio = Net Debt / EBITDA

Where:

Net Debt = (Total Debt - Cash & Cash Equivalents)

The Debt and cash & cash equivalents numbers can be found on the company balance sheet.

What is a good Net debt/EBITDA number

The net debt-to-EBITDA ratio used by analysts to assess the company’s ability to decrease its debt. The higher the ratio the less likely is for the company to be able to handle its debt burden. Generally a net debt to EBITDA above 5 is considered high and potentially problematical by analyst and creditors.

Why is Net debt/EBITDA ratio important

The Net debt/EBITDA ratio is a measurement of company’s ability to pay down debt. However, when analysing debt ration of a company we have to keep in mind the industry. When analysing company’s debt ratios is should always be compared with that of a benchmark or the industry average since debt ratio are highly dependent on the type of industry the company is operating.

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