The net debt-to-EBITDA (earnings before interest depreciation and amortization) ratio is a measurement of leverage, calculated as a company's interest-bearing liabilities minus cash or cash equivalents, divided by its EBITDA. The net debt-to-EBITDA ratio is a debt ratio that shows how many years it would take for a company to pay back its debt if net debt and EBITDA are held constant. However, if a company has more cash than debt, the ratio can be negative. It is similar to the debt/EBITDA ratio, but net debt subtracts cash and cash equivalents while the standard ratio does not.
The net debt-to-EBITDA ratio is a debt ratio that shows how many years it would take for a company to pay back its debt if net debt and EBITDA are held constant.
When analysts look at the net debt-to-EBITDA ratio, they want to know how well a company can cover its debts.
It is similar to the debt/EBITDA ratio, but net debt subtracts cash and cash equivalents while the standard ratio does not.
If a company has more cash than debt, the ratio can be negative.
The net debt-to-EBITDA ratio is popular with analysts because it takes into account a company's ability to decrease its debt. Ratios higher than 4 or 5 typically set off alarm bells because this indicates that a company is less likely to be able to handle its debt burden, and thus is less likely to be able to take on the additional debt required to grow the business.
The net debt-to-EBITDA ratio should be compared with that of a benchmark or the industry average to determine the creditworthiness of a company. Additionally, a horizontal analysis could be conducted to determine whether a company has increased or decreased its debt burden over a specified period. Forhorizontal analysis, ratios or items in the financial statement are compared with those of previous periods to determine how the company has grown over the specified time frame.
Example of How to Use Net Debt-to-EBITDA
Suppose an investor wishes to conduct horizontal analysis on Company ABCto determine its ability to pay off its debt. For its previous fiscal year, Company ABC's short-term debt was $6.31 billion, long-term debt was $28.99 billion,and cash holdings were $13.84 billion.
Therefore, Company ABC reported a net debt of $21.46 billion, or $6.31 billion-plus$28.99 billion less$13.84 billion, and an EBITDA of $60.60 billion during the fiscal period. Consequently, Company ABC's net debt-to-EBITDA ratio is 0.35 or $21.46 billion divided by$60.60 billion.
Now, for the most recent fiscal year, Company ABC had short-term debt of $8.50 billion, long-term debt of $53.46 billion, and $21.12 billion in cash. The company's net debt increased by 90.31% to $40.84 billion year-over-year. Company ABC reported an EBITDA of $77.89 billion, a 28.53% increase from its EBITDA the previous year.
Therefore, Company ABC had a net debt to EBITDA ratio of 0.52 or $40.84 billion divided by$77.89 billion. Company ABC'snet debt to EBITDA ratio increased by 0.17, or 49.81% year-over-year.
Limitations of Using Net Debt-to-EBITDA
Analysts like the net debt/EBITDA ratio because it is easy to calculate. Debt figures can be found on the balance sheet and EBITDA can be calculated from the income statement. The issue, however, is that it may not provide the most accurate measure of earnings. More than earnings, analysts want to gauge the amount of cash available for debt repayment.
Depreciation and amortization are non-cash expenses that do not really impact cash flows, but interest can be a significant expense for some companies. Banks and investors looking at the current debt/EBITDA ratio to gain insight on how well the company can pay for its debt may want to consider the impact of interest on the debt, even if that debt will be included in new issuance. In this way, net income minus capital expenditures, plus depreciation and amortization may be the better measure of cash available for debt repayment.
Net debt-to-EBITA ratio is a measurement of leverage, calculated as a company's interest-bearing liabilities minus cash, divided by EBITDA. Cash flow is the net cash and cash equivalents that move in and out of a company's financial statement.
The formula to calculate the net debt to EBITDA ratio is equal to net debt divided by EBITDA in the corresponding period. Where: Net Debt = (Short-Term Debt + Long-Term Debt) – Cash and Cash Equivalents. EBITDA = EBIT + Depreciation and Amortization (D&A) + Non-Recurring Items.
Company ABC reported an EBITDA of $77.89 billion, a 28.53% increase from its EBITDA the previous year. Therefore, Company ABC had a net debt to EBITDA ratio of 0.52 or $40.84 billion divided by $77.89 billion. Company ABC's net debt to EBITDA ratio increased by 0.17, or 49.81% year-over-year.
If your debt ratio does not exceed 30%, the banks will find it excellent. Your ratio shows that if you manage your daily expenses well, you should be able to pay off your debts without worry or penalty. A debt ratio between 30% and 36% is also considered good.
Generally, net debt-to-EBITDA ratios of less than 3 are considered acceptable. The lower the ratio, the higher the probability of the firm successfully paying and refinancing its debt. With the lower probability of a company defaulting, the company's credit rating is likely better than the industry average.
2.0 or Greater. Though there is no industry standard, a DSCR of at least 2 is considered very strong and shows that a company can cover two times its debt. Many lenders will set minimum DSCR requirements between 1.2 and 1.25.
It's ideal for analysts and investors looking to compare companies within the same industry. The enterprise-value-to-EBITDA ratio is calculated by dividing EV by EBITDA or earnings before interest, taxes, depreciation, and amortization. Typically, EV/EBITDA values below 10 are seen as healthy.
Net debt is the book value of a company's gross debt less any cash and cash-like assets on the balance sheet. Net debt shows how much debt a company has once it has paid all its debt obligations with its existing cash balances. Gross debt is the total book value of a company's debt obligations.
Only liabilities in the form of debt are taken into account. Some of the examples of non-debt liabilities that should not be added into the formula include accounts payable, accrued expenses, and wages payable.
The debt-to-EBITDA ratio is used by lenders, valuation analysts, and investors to gauge a company's liquidity position and financial health. The ratio shows how much actual cash flow the company has available to cover its debt and other liabilities.
The debt-to-equity ratio measures how much debt a company has relative to its shareholders' equity. It indicates how much leverage a company is using to finance its assets and operations. A high debt-to-equity ratio means that a company has more debt than equity, which implies a higher risk of default and insolvency.
Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.
This calculation is most useful for analyzing business financial statements, or calculating the DSCR for a business, and uses EBITDA, instead of Net Operating Income: DSCR = EBITDA / Total Debt Service where EBITDA = Pre-tax income + Interest Expense + Depreciation + Amortization.
Net debt is calculated by adding up all of a company's short- and long-term liabilities and subtracting its current assets. This figure reflects a company's ability to meet all of its obligations simultaneously using only those assets that are easily liquidated.
The debt-service coverage ratio formula divides the company's annual net operating income (NOI) by its total annual debt service. For example, if a property generates an annual NOI of $500,000 with a yearly mortgage payment of $400,000, the DSCR formula is applied as $500,000 divided by $400,000, which equals 1.25.
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