A Debt to EBITDA Ratio Calculator helps businesses, investors, and financial analysts evaluate a company's financial health by measuring its ability to repay debt using earnings. This ratio is a key metric used by lenders and investors to assess a company's financial stability and debt management capacity.
A lower Debt to EBITDA ratio indicates that a company has strong earnings relative to its debt, making it financially stable. A higher ratio suggests a greater reliance on debt, which could indicate financial risk. Companies with a lower ratio are generally in a better position to secure loans, refinance existing debt, or attract investors.
Formula for Debt to EBITDA Ratio Calculation
The formula used to calculate the Debt to EBITDA Ratio is:
Debt to EBITDA Ratio = (Total Debt) ÷ (EBITDA)
Where:
Total Debt = Short-term Debt + Long-term Debt
EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization
This formula helps determine how many years it would take a company to repay its total debt using its current earnings before accounting for interest, taxes, depreciation, and amortization. A lower ratio (below 3.0) indicates financial stability, while a higher ratio (above 4.0 or 5.0) may suggest excessive leverage and potential repayment difficulties.
Debt to EBITDA Ratio Reference Table
To simplify financial analysis, the following table provides estimated Debt to EBITDA ratios based on different debt and EBITDA values.
| Total Debt ($) | EBITDA ($) | Debt to EBITDA Ratio | Financial Risk Level |
|---|---|---|---|
| 500,000 | 250,000 | 2.0 | Low Risk |
| 1,000,000 | 500,000 | 2.0 | Low Risk |
| 2,000,000 | 750,000 | 2.67 | Moderate Risk |
| 3,000,000 | 750,000 | 4.0 | High Risk |
| 4,000,000 | 800,000 | 5.0 | Critical Risk |
A Debt to EBITDA ratio below 3.0 is considered safe, while a ratio above 4.0 may indicate financial instability, making it difficult for a company to secure loans or refinance existing debt.
Example of Debt To EBITDA Ratio Calculator
A company has $2,500,000 in total debt and an EBITDA of $1,000,000.
Step 1: Apply the Debt to EBITDA Ratio Formula
Debt to EBITDA Ratio = 2,500,000 ÷ 1,000,000
Step 2: Compute the Result
Debt to EBITDA Ratio = 2.5
This means that the company has 2.5 years’ worth of EBITDA to fully repay its total debt, suggesting a moderate financial risk level.
Most Common FAQs
A Debt to EBITDA ratio below 3.0 is generally considered financially stable. A ratio between 3.0 and 4.0 indicates moderate risk, while a ratio above 4.0 or 5.0 suggests potential financial stress and difficulty managing debt obligations.
A company can improve its Debt to EBITDA ratio by increasing EBITDA through higher revenue or cost-cutting measures. Reducing total debt by paying off loans or refinancing at lower interest rates also helps lower the ratio.
Lenders use the Debt to EBITDA ratio to assess a company’s ability to repay its debt obligations. A lower ratio indicates a stronger financial position, making the company more likely to qualify for loans or secure better interest rates.