Net debt divided by EBITDA — net debt being total debt minus cash and equivalents. It's the standard leverage metric in credit analysis, answering a more practical question than debt-to-equity: not how big is the debt relative to the balance sheet, but how long would it take to pay it off from operating cash earnings.
The formula
Total Debt − CashEBITDA
= Net Debt / EBITDA
Why it matters
- —Credit rating agencies and lenders watch this ratio closely — it's often the trigger for covenant breaches in loan agreements.
- —Unlike debt-to-equity, it ignores the accounting value of equity entirely and focuses purely on debt serviceability from cash earnings.
- —Capital-intensive, stable-cash-flow industries (utilities, telecom) can sustain higher ratios than cyclical or asset-light businesses.
How to read it
| < 2× | Conservative — debt could be repaid quickly from cash earnings |
| 2×–4× | Moderate leverage, common for stable-cash-flow industries |
| > 5× | Aggressive leverage — refinancing risk rises with rates or a downturn |