Net Debt-to-EBITDA

A leverage ratio that measures a company's ability to pay off its incurred debt using its core operating cash flow.

Net Debt-to-EBITDA is a leverage ratio that compares a company's net financial obligations to its annual earnings before interest, taxes, depreciation, and amortization (EBITDA). By subtracting cash and cash equivalents from total debt, the ratio focuses on the net debt that would remain if the company used its existing cash balance to pay down as much debt as possible. It estimates how many years it would take for a company to pay back its remaining debt if net debt and operating cash generation remained constant. Credit rating agencies, lenders, and equity investors use this metric to assess a company's financial health, debt capacity, and default risk. Because EBITDA serves as a proxy for operating cash flow, this ratio provides a clearer picture of debt-servicing ability than looking at total debt alone. It is especially common in capital-intensive industries and when evaluating highly leveraged companies or potential acquisition targets. Generally, a low ratio (typically below 2.0x) indicates a strong balance sheet with highly manageable debt. A high ratio (often above 4.0x or 5.0x) signals high leverage, which can trigger credit rating downgrades, increase borrowing costs, and limit financial flexibility. However, investors must be cautious: EBITDA does not account for capital expenditures or working capital requirements, meaning a company could still face liquidity issues even with an apparently healthy Net Debt-to-EBITDA ratio.

Company A has $500 million in total debt, $100 million in cash and cash equivalents, and generates $200 million in EBITDA. First, calculate net debt: $500 million - $100 million = $400 million. Next, divide net debt by EBITDA: $400 million / $200 million = 2.0x. This means it would take Company A two years to pay off its net debt at its current operating run rate.