Debt to EBITDA ratio: Difference between revisions
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''Credit risk - liquidity - financial ratios - documentation. '' | ''Credit risk - liquidity - financial ratios - documentation. '' | ||
Debt to EBITDA is measure of an organisation's medium and longer term debt servicing capacity. | Debt to EBITDA is a measure of an organisation's medium and longer term debt servicing capacity. | ||
The lower the ratio, the greater the organisation's ability to service and repay its debt. | The lower the ratio, the greater the organisation's ability to service and repay its debt. | ||
Therefore, the lower its credit risk. | |||
The ratio is calculated by dividing the organisation's debt by its EBITDA. | The ratio is calculated by dividing the organisation's debt by its EBITDA. | ||
Borrowing documentation may contain financial covenants, requiring the borrower to keep its debt to EBITDA ratio below the | Borrowing documentation may contain financial covenants, requiring the borrower to keep its debt to EBITDA ratio below the covenanted figure. | ||
:<span style="color:#4B0082">''Covenant test''</span> | :<span style="color:#4B0082">'''Example: Covenant test'''</span> | ||
:G Group's net debt is EUR 350m and its EBITDA is EUR 100m. | :G Group's net debt is EUR 350m and its EBITDA is EUR 100m. | ||
| Line 17: | Line 19: | ||
:G Group's maximum covenanted net debt to EBITDA ratio is 3 times. | :G Group's maximum covenanted net debt to EBITDA ratio is 3 times. | ||
:Is G Group within its financial | :Is G Group within its financial covenant? | ||
Latest revision as of 16:58, 25 March 2021
Credit risk - liquidity - financial ratios - documentation.
Debt to EBITDA is a measure of an organisation's medium and longer term debt servicing capacity.
The lower the ratio, the greater the organisation's ability to service and repay its debt.
Therefore, the lower its credit risk.
The ratio is calculated by dividing the organisation's debt by its EBITDA.
Borrowing documentation may contain financial covenants, requiring the borrower to keep its debt to EBITDA ratio below the covenanted figure.
- Example: Covenant test
- G Group's net debt is EUR 350m and its EBITDA is EUR 100m.
- G Group's maximum covenanted net debt to EBITDA ratio is 3 times.
- Is G Group within its financial covenant?
- Net debt to EBITDA ratio
- = EUR 350m / EUR 100m
- = 3.5 times.
- This is greater than the covenanted maximum of 3 times.
- G Group is in breach of its covenant.
See also
- Breach of covenant
- Condition
- Contract
- Covenant
- Credit risk
- Cross acceleration
- Default
- EBITDA
- Event of default
- Financial covenant
- Financial ratio
- Frozen GAAP
- Headroom
- Interest cover
- Interest rate risk
- Liquidity
- Loan agreement
- Loan to value
- Representations and warranties
- Risk
- Solvency
- Tangible net worth
- Translation risk
- Waiver
- Working capital
