Net debt / EBITDA expresses a company’s borrowings, less the cash it holds against them, as a multiple of its annual cash earnings. A reading of 2.0 says that two years of EBITDA would clear the net borrowings, if every cent of it went to repayment and nothing else changed.
It is the leverage measure lenders actually use, and loan covenants are frequently written directly against it — which is what gives the number teeth. Unlike debt-to-equity, which compares debt to an accounting balance, this ratio compares debt to the thing debt is repaid out of.
Two readings are not numbers at all and should never be treated as zeros. A company holding more cash than debt is in a net cash position, where the ratio is negative and the concept no longer applies. A company with no positive EBITDA has nothing to divide by, and the ratio is not meaningful — which, on a leveraged business, is the most alarming reading of all.
EBITDA is earnings before interest, tax, depreciation and amortisation — a rough proxy for cash earnings, used here because it is the figure available before the cost of the debt itself is taken out. The same net debt is the bridge between market capitalisation and enterprise value.
A company with $1.4bn of total debt, $200m of cash and $600m of EBITDA:
Now let the business have a poor year and EBITDA fall by a third, to $400m. Net debt has not moved, but the ratio jumps to 3.0×. Leverage worsens fastest exactly when trading does, which is why a ratio that looks comfortable in a good year is not the same as a balance sheet that is safe.
Judge the level against the industry rather than against a universal threshold. Utilities and property companies carry several turns of debt against contracted, predictable revenue and are fine; a cyclical manufacturer at the same level is not. As a rough orientation, under 1× is conservative in most industries, 2–3× ordinary, and above 4× something that needs a reason.
Read it with the interest cover and the maturity profile. The ratio says how much is owed relative to earnings; it says nothing about when it must be repaid or what the coupon costs, and a company at 3× with nothing due for eight years is in a different position from one at 2× refinancing next year.
In the app, net debt / EBITDA is one of the twenty-one key metrics on a company page, where “Net Cash” and “N/M” are printed as words rather than as figures for the two cases above.
It matters most for cyclical and capital-intensive businesses, for anything that has recently made a debt-funded acquisition, and whenever interest rates are rising — leverage that was affordable at one cost of borrowing may not be at the next refinancing. It is also one of the first things to check on a high-yielding share: a dividend funded by a stretched balance sheet is the one most likely to be cut.
EBITDA is a generous measure of earnings — it adds back depreciation, and for a business whose assets genuinely wear out that is real money it will have to spend. Many companies also report an “adjusted” EBITDA of their own construction, which flatters the ratio precisely when it matters. The measure also misses obligations that are not classified as debt, such as pension deficits and some leases, treats all cash as though it were available for repayment, and is not meaningful for banks and insurers.