← Business Metric: Financial (all topics)
Net debt to EBITDA
What it is
Total debt less cash, divided by EBITDA - how many years of current operating profit would be needed to repay borrowings. It is the most common leverage covenant in loan documents
Unlike debt to equity, it measures debt against cash generation rather than against book capital
Impact on industries
- Ties borrowing to the cash flow that services it, which is more meaningful than comparing debt to an accounting equity figure
- Its use as a covenant makes it a hard constraint on capital allocation, so it shapes behaviour as well as measuring it
- It flatters at the peak of a cycle when EBITDA is inflated, which is precisely when companies borrow most
- Cyclical businesses should be judged on mid-cycle earnings, since covenant breaches happen in troughs rather than peaks