Net Debt-to-EBITDA Ratio: Definition and Example

The net debt-to-EBITDA ratio measures a company’s debt burden relative to EBITDA after subtracting cash and cash equivalents from debt.

It gives lenders and investors a leverage measure that recognizes the role of cash holdings in reducing net indebtedness.

How It Works

A simple version is:

(total debt - cash and cash equivalents) / EBITDA

This can produce a meaningfully lower leverage figure than gross debt-based ratios when a company holds substantial cash.

Worked Example

Suppose a company has:

• total debt: $800 million
• cash: $200 million
• EBITDA: $150 million

Net debt is $600 million, so net debt-to-EBITDA is:

$600 million / $150 million = 4.0

Scenario Question

An analyst says, “If gross debt is high, net leverage tells us nothing new.”

Answer: Not true. Cash can materially change the effective debt burden, especially for liquidity-rich issuers.

Related Terms

• Gross Debt-to-EBITDA Ratio: Gross leverage ignores cash and can look materially higher.
• Debt-to-EBITDA Ratio: A general leverage concept based on debt relative to EBITDA.
• EBITDA: EBITDA is the earnings base used in the ratio.
• Interest Coverage Ratio: Coverage ratios complement leverage measures by focusing on payment ability.
• Cash Ratio: Cash availability helps explain why net leverage can differ from gross leverage.

FAQs