Net Debt/EBITDA Ratio

A leverage ratio that measures a company’s ability to pay off its debt

What is the Net Debt-to-EBITDA Ratio?

Net debt-to-EBITDA is a leverage ratio that compares a company’s liabilities in the form of net debt to its “cash flow,” in the form of EBITDA (stands for earnings before interest, taxes, depreciation and amortization).

Credit rating agencies and creditors rely on cash flows to measure the financial health and compare companies. Matching a company’s debt to its cash flow is critical when investors and creditors seek to weigh the likelihood of a company defaulting (i.e., unable to repay ongoing obligations as agreed).

Net Debt-to-EBITDA Ratio

While this is similar to the typical debt-to-EBITDA ratio in that both measure how much EBITDA (a loose proxy for operating cash flow) is available to support short-term debt and long-term liabilities, the net debt ratio refers to total debt minus liquid assets, e.g., cash and cash equivalents.

The use of net debt accounts for a legal and enforceable right typically held by senior lenders — the right of set-off. Often, liquid assets owned by a company can be legally used to repay revolving credit and other senior lender obligations in advance of payment to other creditors.

Key Highlights

  • Net Debt-to-EBITDA Ratio assesses financial health and gauges a company’s leverage by comparing its net debt to EBITDA. This informs investors and creditors about the company’s ability to meet debt obligations.
  • A low ratio (below 3) is favorable, indicating a company’s capacity to repay debts and potentially better credit ratings. Conversely, a high ratio (4 to 6+) raises red flags, signaling potential financial distress and risks for investors and creditors.
  • The ratio is commonly used by credit rating agencies and investors but has limitations. It is sensitive to short-term changes, may overlook some liabilities, and should be considered alongside other metrics for a comprehensive evaluation.

Breaking Down the Net Debt-to-EBITDA Ratio 

The net debt-to-EBITDA ratio formula is as follows:

Net Debt:

Net Debt Calculator

  • The company’s total debt is given by the sum of the short-term debt and long-term debt, including notes payable, mortgages, and any other types of interest-bearing obligations. To calculate net debt, lenders take total debt minus cash and cash equivalents, thereby accounting for assets that are immediately available to repay senior creditors.



  • EBITDA is the sum of the company’s earnings before interest, taxes, depreciation and amortization expenses from its income statement. It is a common proxy for operating cash flow and is used to gauge the company’s ability to pay interest expenses, taxes, and support capital-intensive costs; for example, depreciation and amortization are non-cash expenses that represent the diminishing value of assets over the useful life. To learn to convert earnings (net income) and calculate EBITDA, see the following link for additional resources to the EBITDA formula and our free EBITDA calculator.

Net Debt-to-EBITDA (Low or High Ratio?)

A low net debt to EBITDA ratio is generally preferred by analysts, as it indicates that a company is not excessively indebted and should be able to repay its debt obligations compared to others in the same industry.

On the other hand, if the net debt to EBITDA ratio is higher than the industry average, a company may have a high net debt, or its EBITDA is too low to support debt repayment.

Low Ratio

  • Generally, net debt-to-EBITDA ratios of less than 3 are considered acceptable. The lower the ratio, the higher the probability of the firm successfully paying and refinancing its debt.  With the lower probability of a company defaulting, the company’s credit rating is likely better than the industry average. Furthermore, a lower debt to EBITDA means raising additional debt, and the yield on issued debt, are all likely more favorable for that specified period.
  • A lower ratio implies proportionally less debt. However, as most firm’s capital requirements use debt as leverage to generate a sufficient return on equity, ratios below 1 suggest a company’s net debt divided by EBITDA may be too low and the level of “good net debt” can be higher.

High Ratio

  • Ratios greater than 4 are high, according to the IMF, and over 6 is elevated. This range serves as “red flags” to indicate companies that may be financially distressed in the future if cash flows cannot keep up with the debt burden.
  • Higher net debt-to-EBITDA ratios are associated with a potential borrower faced with greater challenges in meeting financial obligations as they come due, such as interest payments and actual cash taxes. This implies a company may have a smaller margin of error for debt repayment (or refinancing) of long-term debt as it comes due.

Application and Limitations of Using Net Debt-to-EBITDA

Credit rating agencies, potential investors, and corporate acquirers (i.e., for a merger or a takeover) often use the net debt-to-EBITDA ratio to value the company’s financial stability. One outcome of the assessment is the determination of the yield the company must pay on its obligations.

It is important to note that the net debt-to-EBITDA ratio is only a single indicator of a company’s financial situation and profitability. Scenarios such as the presence of other liabilities (e.g., off-balance sheet liabilities), as well as adding back interest relating to right-of-use assets to earnings when determining debt to EBITDA, can meaningfully impact EBITDA-ratio measures.

For example, if the company recently invested in property, plant, and equipment (PP&E) via the use of debt, the debt burden for the year is likely to be higher than in other years. Conversely, a company selling significant assets to repay debt may see a future EBITDA reduction.

Finally, changes in income and cash flow (the denominator) may reflect normal volatility rather than reflecting a structural change in the dynamics of the business.

Changes in assets (and debt) affect sales and cash flows in a future fiscal year, thus the net debt-to-EBITDA ratio for the current fiscal year will be impacted by any changes in short-term debt.

In summary, the ratio is not necessarily an accurate indicator of financial stability at a point in time, especially when net debt or cash flow volatility for a specified period is high and a longer period trend is directionally more useful.

Practical Example of Net Debt-to-EBITDA Ratio


According to PitchBook’s Leveraged Commentary Data, the debt/EBITDA ratio of leveraged buyout (LBO) loans has fallen below 5 as of Q1 2023, the lowest in seven years, inclusive of all debt (i.e. first-lien, second-lien, others). Although this is not net debt, the ratio suggests reduced M&A activities that are typically associated with business loans with higher leverage.

Example – AT&T

AT&T released its net debt to EBITDA ratio expectations using the following definitions and formula for its net debt-to-EBITDA ratio:

  • Net Debt of $128.7 billion at September 30, 2023, is calculated as Total Debt of $138.0 billion less Cash and Cash Equivalents of $7.5 billion and Time Deposits (i.e., deposits at financial institutions that are greater than 90 days) of $1.8 billion.
  • Net debt-to-adjusted EBITDA is calculated by dividing net debt by the sum of the most recent four quarters of adjusted EBITDA. Net debt is calculated by subtracting cash and cash equivalents and deposits at financial institutions that are greater than 90 days (e.g., certificates of deposit and time deposits), from the sum of debt maturing within one year and long-term debt.”
  • Adjusted EBITDA is calculated by excluding from operating revenues and operating expenses certain significant items that are non-operational or non-recurring in nature, including dispositions and merger integration and transaction costs, significant abandonments and impairment, benefit-related gains and losses, employee separation and other material gains and losses.”

AT&T’s press release then says it “expects to achieve net debt-to-adjusted EBITDA in the 2.5x range in the first half of 2025.”

If we assume net debt is constant, then that implies EBITDA of $52 billion, as shown below:

Net Debt$128.7
Expected Net Debt to EBITDA Ratio2.5x
EBITDA$52 billion ($128.7 / 2.5x)

AT&T’s debt / EBITDA ratio is associated with stable credit ratings by three rating agencies:

Rating AgencyLong-Term Issuer Rating

With AT&T’s loan agreement, the financial covenant of 3.5x is defined as the following:

  • Beginning on the last day of the first full fiscal quarter ending after the Effective Date, the Borrower will maintain, as of the last day of each fiscal quarter, a ratio of Net Debt for Borrowed Money to Consolidated EBITDA of the Borrower and its Subsidiaries for the four quarters then ended of not more than 3.5 to 1.
  • “Net Debt for Borrowed Money” of any Person means (a) all items that, in accordance with GAAP, would be classified as indebtedness on a Consolidated balance sheet of such Person minus (b) the amount by which the sum of (i) 100% of unrestricted cash and cash equivalents held by the Borrower and its Subsidiaries in the United States (it being understood and agreed that any proceeds of any issuance by the Borrower of unsecured debt securities, other debt securities or borrowing of term loans in connection with financing an acquisition, investment, refinancing or other transaction held or placed into escrow shall be deemed to be unrestricted for purposes of this definition), and funds available on demand by the Borrower and its Subsidiaries in the United States (including but not limited to time deposits), and (ii) 65% of unrestricted cash and cash equivalents held by the Borrower and its Subsidiaries outside of the United States, exceeds $2,000,000,000 in the aggregate. For the avoidance of doubt, any cash and cash equivalents held by the Borrower and its Subsidiaries outside of the United States shall not be considered “restricted” solely as a result of the repatriation of such cash and cash equivalents being subject to any legal limitation or otherwise resulting in adverse tax consequences to the Borrower or any of its Subsidiaries.
  • “Consolidated EBITDA” means, for any Person for any period, Consolidated Net Income of such Person for such period adjusted to exclude the effects of (a) gains or losses from discontinued operations, (b) any extraordinary or other non-recurring non-cash gains or losses (including non-cash restructuring charges), (c) accounting changes including any changes to Accounting Standards Codification 715 (or any subsequently adopted standards relating to pension and postretirement benefits) adopted by the Financial Accounting Standards Board after the date hereof, (d) interest expense, (e) income tax expense or benefit, (f) depreciation, amortization and other non-cash charges (including actuarial gains or losses from pension and postretirement plans), (g) interest income, (h) equity income and losses and (i) other non-operating income or expense. For the purpose of calculating Consolidated EBITDA for any Person for any period, if during such period such Person or any Subsidiary of such Person shall have made a Material Acquisition or Material Disposition, Consolidated EBITDA for such period shall be calculated after giving pro forma effect to such Material Acquisition or Material Disposition as if such Material Acquisition or Material Disposition occurred on the first day of such period.

Thank you for reading CFI’s explanation of the Net Debt to EBITDA Ratio. CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program and other training for financial professionals.

To learn more and expand your career, explore the additional relevant CFI resources below.

Leverage Ratios

Debt Covenants

Debt Capacity Model Template

Net Debt/EBITDA Ratio Template

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