Net Debt-to-EBITDA Ratio

Net Debt-to-EBITDA Ratio: Definition, Formula, and Example

Definition

The net debt-to-EBITDA ratio measures a company’s leverage by comparing its net debt to its earnings. Net debt equals interest-bearing debt minus cash and cash equivalents. EBITDA stands for earnings before interest, taxes, depreciation, and amortization. The ratio estimates how many years of current EBITDA would be needed to repay net debt if all earnings were applied to debt repayment.

Formula

Net Debt-to-EBITDA = (Total Debt − Cash & Equivalents) / EBITDA

A negative result means the company has more cash than debt.

What the Ratio Indicates

• Less than 1: Company has more cash than debt or can repay debt quickly—generally a strong position.
• 1–3: Typically indicates manageable debt levels.
• Above 3: May signal a heavier debt burden and potential difficulty adding or servicing new debt, though context matters.

Industry Considerations

Compare the ratio to industry peers and benchmarks. Capital-intensive sectors (e.g., telecom, utilities) often carry higher net debt-to-EBITDA ratios but may still be creditworthy because of stable cash flows. Use horizontal (trend) analysis to see whether leverage is increasing or decreasing over time.

Example (Illustrative)

Company ABC — prior year:
* Short-term debt: $6.31B
Long-term debt: $28.99B
Cash: $13.84B
* EBITDA: $60.60B

Net debt = $6.31B + $28.99B − $13.84B = $21.46B
Net Debt-to-EBITDA = $21.46B / $60.60B ≈ 0.35

Most recent year:
* Short-term debt: $8.50B
Long-term debt: $53.46B
Cash: $21.12B
* EBITDA: $77.89B

Net debt = $8.50B + $53.46B − $21.12B = $40.84B
Net Debt-to-EBITDA = $40.84B / $77.89B ≈ 0.52

The ratio rose from 0.35 to 0.52 year-over-year, reflecting faster growth in debt than EBITDA, but the company remains under 1 and appears able to meet obligations.

Limitations

• EBITDA is a non-GAAP measure and can overstate cash-generating ability because it excludes interest, taxes, and capital expenditures.
• Net debt-to-EBITDA does not account for interest expense severity or timing of debt maturities.
• It ignores capital expenditure needs; a company with high EBITDA but large ongoing capex may have less free cash to service debt.
• For a clearer picture of cash available for debt repayment, analysts may prefer cash flow measures such as operating cash flow or (net income − capex + depreciation & amortization).

Key Takeaways

• Net Debt-to-EBITDA is a simple, widely used leverage metric that estimates how many years of EBITDA would be needed to repay net debt.
• Interpret the ratio relative to industry norms and trends rather than as an absolute rule.
• Use supplementary metrics (interest coverage, cash flow, debt maturity profile) to assess creditworthiness more completely.