Debt / EBITDA
Corporate Credit Analysis glossary · Credit Metrics & Debt Schedule Modeling
Definition
The ratio of total debt to EBITDA; the most widely used leverage measure. Net Debt/EBITDA (which subtracts cash) is often the more economically meaningful variant.
Debt / EBITDA in plain English
This ratio answers a blunt question: how many years of earnings would it take to pay off all the debt? EBITDA is a rough stand-in for the annual cash a company's core operations churn out, so a Debt/EBITDA of, say, 4 means the debt is about four times one year's earnings — the higher the number, the heavier and riskier the debt load. Analysts often prefer Net Debt/EBITDA, which first subtracts the cash the company already has on hand, since money in the bank could immediately wipe out some of that debt. It's like judging a friend's $40,000 car loan: it feels far less scary if they've got $30,000 sitting in savings ready to cover most of it.
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