Glossary

Debt/EBITDA

Debt/EBITDA is a financial ratio that measures a company’s total debt relative to its earnings before interest, taxes, depreciation, and amortization, indicating its ability to service debt.

Luca Moschini

17 May 2025 — 1 min read

Definition

Debt/EBITDA is a leverage ratio that compares a company’s total debt to its EBITDA. It is used to assess how many years of current operating earnings would be required to repay outstanding debt.

The ratio focuses on operating profitability before financing costs and non-cash expenses, making it a common measure of debt sustainability for lenders, credit analysts, and rating agencies.

How It Works

Debt/EBITDA is calculated by dividing total interest-bearing debt by EBITDA. Total debt includes short-term and long-term borrowings, while EBITDA reflects earnings generated from core operations before interest, taxes, depreciation, and amortization.

A higher ratio indicates greater leverage and potentially higher financial risk, while a lower ratio suggests stronger debt repayment capacity.

Why the Term Matters

Debt/EBITDA is widely used in loan covenants, credit ratings, and corporate finance analysis to evaluate default risk. It helps lenders and investors compare leverage levels across companies and industries.

Because EBITDA excludes certain expenses, the ratio emphasizes cash-generating ability but does not reflect all financial obligations or asset costs.

EBITDA
Leverage Ratio
Credit Risk
Loan Covenants
Enterprise Value

FAQs

What does the Debt/EBITDA ratio measure?
The Debt/EBITDA ratio measures a company’s ability to repay its total debt using earnings generated from operations.

Why do lenders use Debt/EBITDA?
Lenders use Debt/EBITDA to assess default risk and to set financial covenants tied to acceptable leverage levels.

What is considered a high Debt/EBITDA ratio?
A high Debt/EBITDA ratio indicates elevated leverage and may signal increased financial risk or reduced borrowing capacity.

Does Debt/EBITDA follow GAAP standards?
Debt/EBITDA relies on EBITDA, which is not a GAAP metric and may be calculated differently across companies.

Why do credit rating agencies rely on Debt/EBITDA?
Credit rating agencies use Debt/EBITDA to evaluate a company’s capacity to service debt relative to operating earnings

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