The debt to ebitda ratio calculator is used by investors, analysts, and executives to assess a company’s ability to manage its debt obligations.
This metric provides insight into how long it would theoretically take a company to pay off all its debt using its earnings before interest, taxes, depreciation, and amortization (EBITDA).
Debt To Ebitda Ratio Calculator
| Company Name | Industry | Total Debt ($M) | EBITDA ($M) | Debt to EBITDA Ratio | Interpretation |
|---|---|---|---|---|---|
| TechGiant | Technology | 15,000 | 8,000 | 1.88 | Excellent |
| OilCo | Energy | 30,000 | 5,000 | 6.00 | Risky |
| RetailKing | Retail | 5,000 | 1,500 | 3.33 | Good |
| AeroSpace | Aerospace | 20,000 | 3,500 | 5.71 | Potentially concerning |
| BioHealth | Healthcare | 2,000 | 400 | 5.00 | Acceptable for the industry |
Debt To EBITDA Ratio Formula
The formula for calculating the Debt to EBITDA ratio is straightforward:
Debt to EBITDA ratio = Total Debt / EBITDA- Total Debt: This encompasses all of a company’s short-term and long-term debt obligations, including loans, bonds, and lease liabilities.
- EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. This metric represents a company’s operational profitability.
Consider a manufacturing company, GlobalGears, with the following financial data:
- Total Debt: $50 million
- EBITDA: $12.5 million
Applying the formula:
Debt to EBITDA ratio = $50 million / $12.5 million = 4GlobalGears’ Debt to EBITDA ratio of 4 indicates that it would take the company about 4 years to repay its debt using its current EBITDA.
How do you calculate debt to EBITDA ratio?
Calculating the Debt to EBITDA ratio involves a few key steps:
- Gather financial data: Collect information on the company’s total debt and EBITDA from its financial statements.
- Calculate EBITDA (if not provided directly):
- Start with net income
- Add back interest expenses
- Add back taxes
- Add back depreciation and amortization
- Sum up total debt: Include all short-term and long-term debt obligations.
- Apply the formula: Divide total debt by EBITDA.
Let’s walk through an example with EcoEnergy, a renewable energy company:
- Net Income: $8 million
- Interest Expense: $2 million
- Taxes: $3 million
- Depreciation and Amortization: $5 million
- Short-term Debt: $10 million
- Long-term Debt: $40 million
First, calculate EBITDA:
EBITDA = $8M + $2M + $3M + $5M = $18 millionNext, sum up total debt:
Total Debt = $10M + $40M = $50 millionFinally, apply the formula:
Debt to EBITDA ratio = $50 million / $18 million ≈ 2.78EcoEnergy’s Debt to EBITDA ratio of 2.78 suggests a relatively healthy balance between debt and earnings.
What is a good debt to EBITDA ratio?
- Below 3: Generally considered excellent
- 3 to 4: Good, indicates manageable debt levels
- 4 to 5: Acceptable, but may raise some concerns
- Above 5: Often seen as risky, suggesting potential difficulties in managing debt
Determining a “good” Debt to EBITDA ratio depends on various factors, including industry norms, company size, and growth stage.
FuturePharm, a pharmaceutical startup, has a Debt to EBITDA ratio of 3.5. While this might be concerning in some industries, it’s relatively common in the pharmaceutical sector due to high R&D costs and long product development cycles.
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