Net Debt/EBITDA Ratio Template

What is the Net Debt to EBITDA Ratio?

The net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio measures financial leverage and a company’s ability to pay off its debt. Essentially, the net debt to EBITDA ratio (debt/EBITDA) gives an indication as to how long a company would need to operate at its current level to pay off all its debt. The ratio is commonly used by credit rating agencies to determine the probability of a company defaulting on its debt.

A low ratio of net debt/EBITDA is preferred by analysts as it indicates that the company is not excessively indebted and should be able to repay its debt obligations. Conversely, if the net debt/EBITDA is high, it indicates that a company is heavily burdened with debt. That situation would lower the company’s credit rating, and investors would, therefore, require higher yields on bonds to compensate for the higher default risk.

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