Term
Net debt to EBITDA
A leverage ratio expressing how many years it would take a company to repay its net debt out of operating profit before depreciation. Banks often use it in loan covenants, and a value of up to 3 is commonly seen as acceptable.
Updated
What it means
Net debt to EBITDA is a leverage ratio comparing net debt, meaning loans less cash, with annual EBITDA. It shows how many years it would take to repay the debt from operating profit before depreciation if all of it went to repayment.
A value up to 2 or 3 is commonly seen as healthy and above 4 or 5 as high, though it depends on the sector. Stable businesses with predictable revenue, such as infrastructure, can carry more debt than cyclical industries.
Banks and investors like the ratio because it is simple and comparable across companies. It is complemented by the DSCR, which measures the ability to meet repayments and interest from cash flow.
How it works in practice
Loan agreements often include the ratio as a covenant, for example net debt to EBITDA may not exceed 3.5. The company must report it regularly, and a breach can trigger a higher margin or acceleration.
In a company sale it indicates how much acquisition debt a buyer can raise. EBITDA is often cleaned of one-off items to arrive at adjusted EBITDA.
To improve the ratio a company can repay debt, raise EBITDA or retain cash. Banks, however, spot short-term cash shuffling just before the measurement date.
What to watch out for
Contracts define net debt and EBITDA differently: whether leases, factoring, shareholder loans or one-off costs are included. You must know the exact definition in your own agreement, not the generic one.
The ratio captures a single date. Seasonal businesses may hold lots of cash and low net debt at year end while being heavily indebted during the year.
Need the term explained on your own situation? Consulting from €55 / hour excl. VAT, depending on topic and complexity.