What is Net Debt to EBITDA?
Net Debt to EBITDA is a leverage ratio that compares a company’s net interest-bearing debt (debt minus cash) to its trailing EBITDA.
It’s used in credit analysis and M&A to gauge debt burden, refinancing risk, and how much operating earnings can support the capital structure.
Common use cases: covenant testing, debt capacity planning, capital allocation, and comparing leverage across peers (often alongside EV/EBITDA and interest coverage).
Formula
Example
Inputs (TTM / LTM):
- Total debt = $1,000,000,000
- Cash & cash equivalents = $200,000,000
- EBITDA (TTM) = $400,000,000
Results:
- Net Debt = $1,000,000,000 − $200,000,000 = $800,000,000
- Net Debt / EBITDA = $800,000,000 div $400,000,000 = 2.00x
Interpretation (rule-of-thumb): 2.00x often reads as moderate net leverage; stress-test EBITDA downside for covenant headroom and debt service resilience.
Frequently Asked Questions
What exactly should I include in “Total debt” for Net Debt / EBITDA?
Use interest-bearing debt: short-term borrowings + current portion of long-term debt + long-term debt (and include finance leases if you treat them as debt). Exclude operating items like accounts payable unless your covenant definition explicitly treats them as debt.
Should I subtract all cash, or only “cash & cash equivalents” (and what about restricted cash)?
Subtract only cash and cash equivalents you can actually use to repay debt. If cash is restricted (trapped in a subsidiary, escrow, regulatory reserves), don’t net it unless your definition/covenant allows it.
What if EBITDA is negative (or very small) — is the ratio still usable?
Not really. A negative/near-zero EBITDA makes the multiple misleading or meaningless; treat it as “not interpretable” and switch to liquidity and cash-flow metrics (cash runway, interest coverage, FCF, etc.) for decision-making.
What’s a “good” Net Debt / EBITDA level for covenants or lending decisions?
It depends on industry stability and lender/rating adjustments, but as a rule of thumb: ~0–2x is often viewed as low, ~2–4x moderate, and >4x elevated—then validate against your sector comps and your actual covenant definition.
Sources & Methodology