what the debt to ebitda ratio can tell you
the debt to ebitda ratio compares a company s total obligations to the actual cash the company brings in from its operations it reveals how capable the firm is of paying its debt and other liabilities if taxes and the expenses from depreciation and amortization are deferred the ratio can also be used to compare companies without considering their financing methods and non cash assets this is useful because it provides a clearer picture of how debts can be paid a declining debt to ebitda ratio is better than an increasing one because it implies the company is paying off its debt and or growing earnings likewise an increasing debt to ebitda ratio means the company is increasing debt more than earnings limitations of the debt to ebitda ratiosome analysts like the debt to ebitda ratio because it is easy to calculate debt 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 in fact companies often use ebitda to hide or disguise losses over a period depreciation and amortization are non cash expenses that do not really impact cash flows but interest on debt can be a significant expense for some companies banks and investors looking at the debt to ebitda ratio to gain insight into how well the company can pay its debts may want to consider the impact of interest on debt repayment ability even if that debt will be included in new issuance some industries are more capital intensive than others so a company s debt to ebitda ratio should only be compared to the same ratio for other companies in the same industry in some industries a debt to ebitda of 10 could be completely normal while a ratio of three to four is more appropriate in other industries example of debt to ebitda ratioas an example if company a has 100 million in debt and 10 million in ebitda the debt to ebitda ratio is 10 if company a pays off 50 of that debt in the next five years while increasing ebitda to 25 million the debt to ebitda ratio falls to two 