The debt-to-EBITDA ratio is a leverage measure that compares a company’s total debt with its EBITDA (earnings before interest, taxes, depreciation and amortization). It is calculated as total debt, meaning both short-term and long-term debt obligations, divided by EBITDA. A related version, net debt-to-EBITDA, subtracts cash and cash equivalents from debt first.
A higher ratio means the company carries more debt relative to its earnings and would likely need longer to pay that debt off. J.P. Morgan says midsize businesses across industries typically target a maximum ratio of about 2.5 to 4, but healthy levels vary by industry, and lenders weigh it alongside other factors such as capital spending and cash flow.
Source: J.P. Morgan: Debt-to-EBITDA ratio: What it means for borrowing capacity
Image: Chart data on a laptop by Negative Space, CC0, via Wikimedia Commons.
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