what net debt to ebitda can tell you
the net debt to ebitda ratio is popular with analysts because it takes into account a company s ability to decrease its debt ratios higher than 4 or 5 typically set off alarm bells because this indicates that a company is less likely to be able to handle its debt burden and thus is less likely to be able to take on the additional debt required to grow the business the net debt to ebitda ratio should be compared with that of a benchmark or the industry average to determine the creditworthiness of a company additionally a horizontal analysis could be conducted to determine whether a company has increased or decreased its debt burden over a specified period for horizontal analysis ratios or items in the financial statement are compared with those of previous periods to determine how the company has grown over the specified time frame example of how to use net debt to ebitdasuppose an investor wishes to conduct horizontal analysis on company abc to determine its ability to pay off its debt for its previous fiscal year company abc s short term debt was 6 31 billion long term debt was 28 99 billion and cash holdings were 13 84 billion therefore company abc reported a net debt of 21 46 billion or 6 31 billion plus 28 99 billion less 13 84 billion and an ebitda of 60 60 billion during the fiscal period consequently company abc s net debt to ebitda ratio is 0 35 or 21 46 billion divided by 60 60 billion now for the most recent fiscal year company abc had short term debt of 8 50 billion long term debt of 53 46 billion and 21 12 billion in cash the company s net debt increased by 90 31 to 40 84 billion year over year company abc reported an ebitda of 77 89 billion a 28 53 increase from its ebitda the previous year therefore company abc had a net debt to ebitda ratio of 0 52 or 40 84 billion divided by 77 89 billion company abc s net debt to ebitda ratio increased by 0 17 or 49 81 year over year limitations of using net debt to ebitdaanalysts like the net debt ebitda ratio because it is easy to calculate debt figures can be found on the balance sheet and ebitda can be calculated from the income statement the issue however is that it may not provide the most accurate measure of earnings more than earnings analysts want to gauge the amount of cash available for debt repayment depreciation and amortization are non cash expenses that do not really impact cash flows but interest can be a significant expense for some companies banks and investors looking at the current debt ebitda ratio to gain insight on how well the company can pay for its debt may want to consider the impact of interest on the debt even if that debt will be included in new issuance in this way net income minus capital expenditures plus depreciation and amortization may be the better measure of cash available for debt repayment 