Net Debt to EBITDA

Net Debt to EBITDA compares net debt with EBITDA. The metric shows how many annual amounts of EBITDA correspond to net debt. It does not determine the actual repayment period, because interest, taxes, capital expenditure and changes in working capital must also be considered. A low value indicates solid and easily manageable leverage. It is the most important leverage metric in transaction and financing practice, because it measures debt against earning power rather than against balance sheet figures that accounting choices and goodwill can distort. In credit agreements it appears as a covenant with a ceiling that often steps down over the term to reflect planned deleveraging.

The sustainable level depends on sector, earnings stability and market conditions: cyclical or project-driven businesses can carry less, while companies with contractually secured recurring revenue support more. What EBITDA is used is decisive: credit agreements define expressly which adjustments are permitted and whether expected effects of future measures may be included, which can change the ratio considerably. It should be supplemented by interest and debt service cover, because the same debt is differently burdensome at different interest levels, and by the maturity profile, since high leverage with distant maturities is more manageable than moderate leverage falling due shortly.

The ratio is usually calculated on adjusted EBITDA for the last twelve months, which is where debates about the admissibility of individual adjustments begin. Loan agreements therefore define the measure separately and specify which one-off effects may be added back and up to what cap. Standard covenants require compliance with a maximum level at each quarter end, sometimes on a stepped-down path over time. If the level is breached, the agreement may give shareholders cure rights, trigger margin increases or, in extreme cases, acceleration of the loan.