Net Debt to EBITDA ratio
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
Where,
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:
| Particulars | HPCL | BPCL |
| 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 | 1.47x | 1.55x |
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.
2nd Oct 2018 at 02:12 pm