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Net debt / EBITDA

Net debt/EBITDA subtracts cash from interest-bearing debt and divides by EBITDA to show how many years of operating profit are needed to repay debt. Net debt/EBITDA is the most common measure of debt-service capacity.
Contents
  1. 1.Key points
  2. 2.Formula / calculation
  3. 3.Interpretation
  4. 4.Pitfalls
  5. 5.Frequently asked questions

Key points

  • Rating agencies, banks and analysts use it to judge whether a company’s debt load is sustainable.
  • Below 1 is very strong, 1–3 acceptable and above 3 high leverage; 4–5 and above signals refinancing risk.
  • if EBITDA falls the ratio deteriorates quickly; in cyclical sectors a ratio computed on peak EBITDA misleads.

Formula / calculation

Net debt = Short + long-term financial debt − Cash and equivalents; Net debt/EBITDA = Net debt / Annualised EBITDA. Companies with a net cash position have a negative ratio.

Interpretation

Below 1 is very strong, 1–3 acceptable and above 3 high leverage; 4–5 and above signals refinancing risk. In high-rate environments thresholds should be more conservative.

Pitfalls

if EBITDA falls the ratio deteriorates quickly; in cyclical sectors a ratio computed on peak EBITDA misleads. FX debt jumps in currency shocks. It is not computed for banks and financials.

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Frequently asked questions

Net debt/EBITDA subtracts cash from interest-bearing debt and divides by EBITDA to show how many years of operating profit are needed to repay debt.

Net debt = Short + long-term financial debt − Cash and equivalents; Net debt/EBITDA = Net debt / Annualised EBITDA. Companies with a net cash position have a negative ratio.

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