Net Debt-to-EBITDA Ratio
Candlefocus EditorNet debt represents total debt obligations of a company minus cash and cash equivalents. EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. It is a measure of the company’s underlying operating performance.
Analysts want to know how well a company can cover its debts by looking at the net debt-to-EBITDA ratio. A ratio of less than one suggests that the company's earnings are sufficient enough to cover its debt obligations. On the other hand, a ratio of more than one indicates that the company's debt obligations exceed its earnings and may be unable to pay back its debt without additional funds.
The ratio is an important tool to measure financial solvency of a company and is used by investors to assess the credit risk of a company and its capacity to service its debt. Generally, a low ratio is considered ideal as it suggests that the company is able to pay back its debt.
The net debt-to-EBITDA ratio can be used in conjunction with other financial ratios to evaluate the overall financial condition of the company. For instance, it is useful to compare the net debt-to-EBITDA ratio with the return on equity or return on assets, as this may paint a better picture of the company’s financial position.
Overall, the net debt-to-EBITDA ratio is an important indicator to determine the company’s ability to service its debt. Analysts and investors can use this ratio to assess a company’s creditworthiness and overall financial solvency. Additionally, it can be used in combination with other financial ratios to get a comprehensive evaluation of the company.