Net debt to EBITDA
Leverage Ratio
Net debt to EBITDA tells you how many years of operating cash profit it would take to repay all borrowings, net of cash on hand. It is the leverage measure lenders and rating agencies actually use.
Formula
Net debt / EBITDA
Net Debt to EBITDA = (Total Debt − Cash and Cash Equivalents) ÷ EBITDA
Benchmark: Below 1 is conservative; above 3 is stretched for most non-financial companies
Reading the number
Debt to equity compares borrowings with the accounting value of equity, which can be small for a great business and large for a bad one. Net debt to EBITDA compares borrowings with the cash profit that will actually service them, which is what matters when a bad year arrives.
A reading of 1 means one year of EBITDA clears all debt. A reading of 4 means four years, during which any downturn in EBITDA stretches it further. Rating agencies weigh this ratio heavily, and loan covenants are often written around it, so a company drifting above 3 tends to find its borrowing costs rising.
Indian example
Related ratios
Glossary terms
From the research
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