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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 with 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. For 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.

Net Debt to EBITDA Example

Suppose an investor wishes to conduct 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 reported net debt of $21.46 billion, or $6.31 billion plus $28.99 billion less $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 divided by $60.60 billion.

For its recent fiscal year, Apple had short-term debt of $8.50 billion, a long-term debt of $53.46 billion, and $21.12 billion cash. The company increased its net debt by 90.31%, to $40.84 billion year-over-year. Company ABC reported an EBITDA of $77.89 billion, a 28.53% increase from its EBITDA the previous year.

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

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