Debt-to-EBITDA ratio
In one sentenceThe interest-bearing debt of the business divided by its earnings before interest, taxes, depreciation, and amortization, showing how many years it needs to repay it.
Simply put
This ratio asks a question that matters to any lender: if the business devoted all its operating earnings before depreciation to repaying its debt, how many years would it need?
The lower the ratio, the lighter the debt is on the business. Some lenders use “net debt”, meaning debt minus available cash, so read the terms of the financing agreement to know which definition is meant.
Worked example
A plastics factory has outstanding bank financing of 3,000,000 SAR and achieved EBITDA of 1,200,000 SAR for the year.
Interest-bearing debt3,000,000 SAR
Annual EBITDA1,200,000 SAR
Ratio = 3,000,000 ÷ 1,200,0002.5 times
Formula: Interest-bearing debt ÷ EBITDA
Don't confuse it with
Debt-to-equity ratioThat ratio compares debt with what the owners have put into the business; this one compares debt with the business's ability to generate operating earnings.