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 Fixed Charges

    A ratio used to measure a company's ability to incur additional ...
  2. Adjusted EBITDA

    Adjusted EBITDA is a measure computed for a company that looks ...
  3. EBITDA Margin

    EBITDA margin is a measurement of a company's operating profitability ...
  4. Debt/EBITDA

    A measure of a company's ability to pay off its incurred debt. ...
  5. Leverage Ratio

    A leverage ratio is any one of several financial measurements ...
  6. Long-Term Debt

    Long-term debt consists of loans and financial obligations lasting ...
Related Articles
  1. Investing

    A Clear Look At EBITDA

    This measure has its benefits, but it can also present earnings through rose-colored glasses.
  2. Investing

    4 Leverage Ratios Used In Evaluating Energy Firms

    These four leverage ratios can help investors evaluate how energy manage their debt.
  3. Investing

    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.
  4. Investing

    Will Corporate Debt Drag Your Stock Down?

    Corporate debt can mean a leg up for firms, or the boot for investors. How to tell the difference.
  5. Investing

    Analyzing AT&T's Debt Ratios in 2016 (T)

    Learn about AT&T Inc. and its key debt ratios, such as the debt-to-equity ratio, interest coverage ratio and cash flow-to-debt ratio.
  6. Personal Finance

    Why Debt Isn’t Always a Bad Thing

    When managed properly, debt can be used to achieve a higher overall rate of return.
  7. Investing

    The Debt Report: The Industrials Sector

    Discover how industrial companies in the United States have added more debt since the Great Recession, which could spell trouble if interest rates rise.
RELATED FAQS
  1. If a company has a high debt to capital ratio, what else should I look at before ...

    Learn about some of the financial leverage and profitability ratios that investors can analyze to supplement examining the ... Read Answer >>
  2. Does a high debt to capital ratio make a company a bad investment?

    Understand the debt to capital ratio and why a high debt to capital ratio doesn't necessarily mean that a stock is a bad ... Read Answer >>
  3. What measures should a company take if its total debt to total assets ratio is too ...

    Learn how the total debt to total assets ratio is analyzed by investors and lenders, and how a high ratio can be remedied ... Read Answer >>
Hot Definitions
  1. Treasury Yield

    Treasury yield is the return on investment, expressed as a percentage, on the U.S. government's debt obligations.
  2. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  3. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  4. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  5. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  6. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
Trading Center