Net Debt To EBITDA Ratio

Loading the player...

What is the 'Net Debt To EBITDA Ratio'

The net debt to earnings before interest depreciation and amortization (EBITDA) 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. If a company has more cash than debt, the ratio can be negative.

BREAKING DOWN 'Net Debt To EBITDA Ratio'

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 to that of a benchmark or the industry average to determine the creditworthiness of a company. Additionally, horizontal analysis could be conducted to determine whether a company has increased or decreased its debt burden over a specified period. In horizontal analysis, ratios or items in the financial statement are compared to those of previous periods to determine how the company has grown over the specified period.

Net Debt to EBITDA Example

Suppose an investor wishes to conduct horizontal analysis on Apple Inc. (NASDAQ: AAPL) to determine its ability to pay off its debt. For the fiscal year ending on Sept. 27, 2014, Apple reported short-term debt of $6.31 billion, long-term debt of $28.99 billion and cash and cash equivalents of $13.84 billion. Therefore, Apple reported net debt of $21.46 billion, or $6.31 billion + $28.99 billion - $13.84 billion, and an EBITDA of $60.60 billion during the fiscal period. Consequently, Apple had a net debt to EBITDA ratio of 0.35, or $21.46 billion / $60.60 billion.

For the 2015 fiscal year, Apple had short-term debt of $8.50 billion, long-term debt of $53.46 billion, and cash and cash equivalents of $21.12 billion. The company increased its net debt by 90.31%, to $40.84 billion year over year (YOY). Apple reported an EBITDA of $77.89 billion, a 28.53% increase from its EBITDA in 2014. Therefore, Apple had a net debt to EBITDA ratio of 0.52, or $40.84 billion / $77.89 billion. Although Apple's net debt to EBITDA ratio increased by 0.17, or 49.81% YOY, the company is likely to handle its debt burden. Moreover, Apple could take on additional debt to grow if it needs to do so.

RELATED TERMS
  1. EBITDA to sales ratio

    A financial metric used to assess a company's profitability by ...
  2. EBITDA - Earnings Before Interest, ...

    Learn what EBITDA is, watch a short video to learn more and with ...
  3. EBITDA Margin

    A measurement of a company's operating profitability. It is equal ...
  4. Adjusted EBITDA

    Adjusted EBITDA is a measure computed for a company that looks ...
  5. EBITDA To Fixed Charges

    A ratio used to measure a company's ability to incur additional ...
  6. Debt/EBITDA

    A measure of a company's ability to pay off its incurred debt. ...
Related Articles
  1. Investing

    Calculating the Net Debt to EBITDA Ratio

    Financial analysts typically use the net debt to EBITDA ratio to determine a company’s ability to pay its debt.
  2. Investing

    EBITDA: Challenging The Calculation

    This measure has a bad rap, but it's still a valuable tool when used appropriately.
  3. Investing

    Should You Ignore EBITDA?

    EBITDA may get a bad rap in the financial world, but it can actually help investors create an apples-to-apples comparison.
  4. Investing

    Free Cash Flow vs EBITDA: Which Should You Analyze?

    FCF and EBITDA are two ways of looking at the earnings of a business. EBITDA might be better for comparison purposes, while FCF is good for valuation.
  5. Investing

    Explaining the EBITDA Margin

    EBITDA margin can provide an investor with a cleaner view of a company's core profitability.
  6. Markets

    Analyzing Apple's Debt Ratios in 2016 (AAPL)

    Discover detailed analyses of Apple's four debt ratios over quarterly and annual periods between 2014 and 2015, and learn why it is financially stable.
  7. Investing

    Debt Ratio

    The debt ratio divides a company’s total debt by its total assets to tell us how highly leveraged a company is—in other words, how much of its assets are financed by debt. The debt component ...
  8. Markets

    4 Leverage Ratios Used In Evaluating Energy Firms

    These four leverage ratios can help investors understand how oil and gas firms are managing their debt.
  9. Markets

    Apple Stock: Capital Structure Analysis (AAPL)

    Learn about how Apple's common stock buyback strategy has impacted the company's capitalization profile and enterprise value since the end of 2014.
  10. Trading

    Calculating the Debt/EBITDA Ratio

    The debt-to-EBITDA ratio measures a company’s ability to pay off its debt.
RELATED FAQS
  1. What are the risks of relying on EBITDA margin data when making an investment?

    Understand the risks of relying on EBITDA margin data when making an investment decision in a company. Learn what the EBITDA ... Read Answer >>
  2. What exactly does EBITDA margin tell investors about a company?

    Discover what investors can learn from the EBITDA margin. How does it compare to other profitability ratios and what are ... Read Answer >>
  3. Why is the EBITDA margin considered to be a good indicator of a company's financial ...

    Understand why the EBITDA margin is a good indicator of a company's financial health. Learn why it also has some drawbacks ... Read Answer >>
  4. What are the main benchmarks that track the forest products sector?

    Learn how the net debt to EBITDA ratio, EBITDA to interest ratio and debt to capital ratio financial benchmarks are used ... Read Answer >>
  5. What is the formula for calculating EBITDA?

    Learn about EBITDA and how companies can manipulate this calculation to look more profitable. Read Answer >>
  6. What are the differences between gross profit and EBITDA?

    Learn how to distinguish between gross profit and EBITDA figures and where to find the information necessary to calculate ... Read Answer >>
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
Trading Center