Net Debt to EBITDA ratio

By Research Desk
about 4 months ago

The net debt to EBITDA ratio is a debt ratio which indicates that how many years a company would take to pay back its debt if net debt and EBITDA are held constant. If a company has more cash than debt, the ratio can be negative.

         Net Debt to EBITDA Ratio = Net Debt / EBITDA


         Net Debt = Short Term Debt + Long Term Debt - Cash & Cash Equivalents

         EBITDA = Profit After tax + Tax + Interest + Depreciation + Amortization

Net debt to EBITDA ratio is a measures the leveraged position of a company and is calculated by keeping company's interest-bearing liabilities minus cash or cash equivalents in the numerator and EBITDA in the denominator.

Let us take an example of HPCL and BPCL comparing their ratios for FY 2018:




Long Term Debt (A)

Rs. 8,831 crores

Rs. 14,758 crores

Short Term Debt (B)

Rs. 10,762 crores

Rs. 8,093 crores

Cash & Cash Equivalents (C)

Rs. 1,194 crores

Rs. 88 crores

Profit After Tax (D)

Rs. 6,357 crores

Rs. 7,919 crores

Tax (E)

Rs. 2,845 crores

Rs. 3,279 crores

Interest (F)

Rs. 567 crores

Rs. 833 crores

Depreciation & Amortization (G)

Rs. 2,753 crores

Rs. 2,648 crores

Net Debt (A) + (B) - (C)

Rs. 18,399 crores

Rs. 22,763 crores

EBITDA (D) + (E) + (F) + (G)

Rs. 12,522 crores

Rs. 14,679 crores

Net Debt to EBITDA Ratio



In the above case, the Net debt to EBITDA ratio of HPCL is marginally better than BPCL which indicates that HPCL will be able to meet its debt obligations better than BPCL.

Thus Net debt to EBITDA is a profitability ratio which helps analyse the creditworthiness of a business. The higher the ratio, the more concerning is the situation for the company as it indicates that the company is heavily leveraged and excessively indebted as EBITDA or operating cash flows are insufficient in paying off debts. This can also potentially lower company’s credit rating.

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