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

> **Definition**
>
> The net debt-to-EBITDA ratio compares a company's debt to its earnings and can indicate its ability to make its debt payments.

## What Is the Net Debt-to-EBITDA Ratio?

The net debt-to-[EBITDA](https://www.investopedia.com/terms/e/ebitda.asp) ratio is a measurement of leverage, calculated as a company's interest-bearing liabilities minus cash or cash equivalents, divided by its EBITDA.

EBITDA stands for earnings before interest, taxes, depreciation and amortization.

Net debt-to-EBITDA shows in years how long it would take a company to pay back its debt, if the earnings were used for debt repayment only.

A company with more cash than debt would have a negative net debt-to-EBITDA ratio.

It is similar to the [debt/EBITDA ratio](https://www.investopedia.com/terms/d/debt_edbitda.asp), but net debt subtracts cash and cash equivalents while the standard ratio does not.

### Key Takeaways

*   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, a positive sign for meeting its debt obligations.
*   A ratio of 1 to 3 can indicate debt manageability, while a ratio higher than 3 may mean trouble.

  

![Net Debt-to-EBITDA Ratio](https://www.investopedia.com/thmb/6KwN7eAZ6IKNgwhzwR1Dtmh7hls=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/netdebttoebitdaratio_updated-7d4f9110599f40edba307ba589ea2c68.png)

*Net debt-to-EBITDA can provide insight into a company's risk exposure and financial health. — Investopedia / Julie Bang*

## The Formula for Net Debt-to-EBITDA

﻿ $Net \ Debt \ to \ EBITDA = \frac{Total \ Debt - Cash \& Equivalents}{EBITDA}$﻿

## What Net Debt-to-EBITDA Can Tell You

The net debt-to-EBITDA ratio is popular with analysts because it offers a view of a company's ability to decrease its debt.

A ratio of less than 1 (a negative ratio) means that a company has more cash than debt and can most likely pay debt off without difficulty.

A ratio of 1 to 3 generally indicates that a company can manage its debt payments.

Ratios higher than 3 can set off alarm bells because a company may have trouble handling its debt burden. Thus, it is less likely to be able to take on the additional debt required to grow the business.

### Industry Comparisons

The net debt-to-EBITDA ratio should be compared with that of a benchmark or the industry average to determine a company's risk and its creditworthiness.

Some industries, such as telecom and utilities, are capital intensive and the companies in them may have higher net debt to EBITDA ratios naturally. But risk isn't necessarily an issue for them because these companies tend to have stable income and are able to manage their debt burdens well.

Additionally, a [horizontal analysis](https://www.investopedia.com/terms/h/horizontalanalysis.asp) could be conducted to determine whether a company has increased or decreased its debt burden over a specified period.

For a horizontal 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 a horizontal analysis on Company ABC to 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 had net debt of $21.46 billion ($6.31 billion + $28.99 billion - $13.84 billion). Its EBITDA was $60.60 billion during the fiscal period.

Consequently, Company ABC's net debt-to-EBITDA ratio was 0.35 ($21.46 billion ÷ $60.60 billion). That's an indication of financial health.

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 to $40.84 billion year-over-year. Its EBITDA grew to $77.89 billion. (That's a 90.31% increase in net debt and a 28.53% increase in EBITDA.)

Therefore, Company ABC had a net debt-to-EBITDA ratio of 0.52 ($40.84 billion divided by $77.89 billion). The ratio increased by 0.17, or 49.81% year-over-year.

Still under 1, the company can feel confident in its ability to meet debt obligations even as it acknowledges a growth in the debt greater than growth in income.

## 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 net 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.