What is Debt-to-EBITDA? Measuring How Leveraged a Company Is
Debt/EBITDA shows how many years of earnings it takes to repay all debt.
Debt-to-EBITDA ratio divides total debt by annual EBITDA. It estimates how many years of operating cash earnings the company would need to repay all its debt. A ratio of 2 means the company could theoretically pay off all debt in two years using its EBITDA.
If total debt is Rs.10,000 crore and EBITDA is Rs.5,000 crore, the ratio is 2x. This means two years of operating earnings can cover the entire debt. Lower is better. A ratio of 6 means six years of earnings to repay debt, which is highly leveraged.
Debt/EBITDA = Total Debt / EBITDA
If Total Debt Rs.6,000 Cr and EBITDA Rs.3,000 Cr: Debt/EBITDA = 6,000 / 3,000 = 2.0x
What level is considered safe?
Below 2x is conservative. 2 to 3x is moderate. 3 to 4x is leveraged but acceptable for some industries. Above 4x is highly leveraged. Above 6x is dangerous for most non-financial companies. Rating agencies often use 3.5x as a threshold for investment-grade ratings.
Why do lenders use Debt/EBITDA?
EBITDA approximates cash earnings before financing and tax. Dividing debt by EBITDA gives a standardized measure of how long it takes to repay, comparable across companies and industries. Loan covenants often include maximum Debt/EBITDA thresholds.
Analyze leverage ratios on Stockk Equity. Use StockkAsk to flag overleveraged companies in your portfolio.
Investments in securities market are subject to market risks. This article is for educational purposes only and does not constitute investment advice. INDIRA SECURITIES PRIVATE LIMITED : SEBI REG. NO.: INZ000188930, NSE TMID: 12866, BSE TMID: 663, CDSL DPID: 17000, MCX TM ID: 56470, NCDEX TM ID: 01277, CDSL REG.NO.: IN-DP-90-2015, CIN:U67120MP1996PTC085111, RA SEBI REG. No.: INH000023269, IA SEBI REG No.: INA000021410. For any complaints pertaining to securities broking please write to [email protected], for DP related to [email protected].
Frequently Asked Questions
Is Debt/EBITDA better than D/E ratio?
Each measures different things. D/E compares debt to equity (balance sheet view). Debt/EBITDA compares debt to earnings (repayment capacity view). Both together give a complete leverage picture.
Can Debt/EBITDA improve even if debt increases?
Yes, if EBITDA grows faster than debt. A company borrowing Rs.1,000 crore to build capacity that generates Rs.500 crore additional EBITDA annually will see the ratio improve over time.
How does the ratio change cyclically?
In boom periods, EBITDA rises and the ratio improves even with same debt. In downturns, EBITDA falls and the ratio worsens. Assess the ratio at both peak and trough of the cycle for a fair picture.
What about net Debt/EBITDA?
Net debt = total debt minus cash. This is more accurate because cash can repay some debt. A company with Rs.10,000 crore debt and Rs.4,000 crore cash has net debt of Rs.6,000 crore. Net Debt/EBITDA is the preferred version.
Which Indian sectors have the highest Debt/EBITDA?
Telecom (Vodafone Idea historically above 10x), power, real estate, and infrastructure typically have high ratios. IT and FMCG have the lowest. Sector context is essential for judging what constitutes excessive leverage.
Investments in securities market are subject to market risks. This article is for educational purposes only and does not constitute investment advice.
INDIRA SECURITIES PRIVATE LIMITED : SEBI REG. NO.: INZ000188930, NSE TMID: 12866, BSE TMID: 663, CDSL DPID: 17000, MCX TM ID: 56470, NCDEX TM ID: 01277, CDSL REG.NO.: IN-DP-90-2015, CIN:U67120MP1996PTC085111, RA SEBI REG. No.: INH000023269, IA SEBI REG No.: INA000021410
