Debt to EBITDA ratio

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