How to Calculate the Debt-to-EBITDA Ratio

How to calculate the debt-to-EBITDA ratio, step by step

The debt-to-EBITDA ratio is one division that answers one question: how many years of earnings would it take to repay the debt? Lenders ask it first, because it tells them how long the earnings have to keep coming before the debt is gone. The ratio is the total debt divided by the EBITDA — the earnings before interest, tax, depreciation and amortisation. The answer is a number of years: a ratio of 4.00 means four years of earnings to repay the debt.

The formula is debt-to-EBITDA ratio = total debt ÷ EBITDA. Total debt is everything the company owes — loans, bonds, leases and any other borrowing, short-term and long-term together. EBITDA is the operating earnings before the financing and accounting charges are taken out: earnings before interest, tax, depreciation and amortisation. Both figures come from the same year, in the same currency, or the ratio is wrong before it starts.

The worked example, line by line. Step 1 — the total debt: $500,000. Step 2 — the EBITDA: $125,000. Step 3 — the division: $500,000 ÷ $125,000 = 4.00. Step 4 — the meaning: 4.00 means four years of earnings to repay the debt. Step 5 — the check: at $625,000 of debt the ratio is 5.00, and at $624,999 it is 4.9999920 — below 5.00, though it displays as 5.00. Work it yourself in the debt-to-EBITDA ratio calculator.

What the number means

A ratio of 4.00 means four years of earnings to repay the debt. A ratio of 2.00 means two years, and a ratio of 5.00 means five years. The lower the number, the fewer years of earnings the debt takes, and the lighter the burden. The higher the number, the more years of earnings the debt takes, and the heavier the burden. Lenders start to worry as the number climbs, because the earnings have to keep coming for longer before the debt is gone — and earnings do not always keep coming.

What moves the ratio

Debt moves it fastest in one direction: every extra dollar of debt adds one dollar divided by the EBITDA to the ratio, so on $125,000 of EBITDA each $125,000 of debt is worth exactly 1.00. Earnings move it the other way, and not in a straight line: the ratio is the debt divided by the earnings, so doubling the earnings halves the ratio, and halving the earnings doubles it. Paying down debt lowers the ratio dollar for dollar, and growing earnings lowers it faster.

Debt-to-EBITDA vs the single ratios

The debt-to-income calculator measures a person’s monthly debt payments against their gross monthly income — the number mortgage lenders use — and it is not the same ratio: one is for companies, the other is for people. Work it out in the debt-to-income ratio calculator. The interest coverage ratio divides EBIT by interest — how many times the earnings cover the interest bill — and it answers whether the company can pay the interest, not how many years the whole debt takes. Read the guide to the interest coverage ratio. The debt service coverage ratio divides cash flow by debt service — whether the cash covers the payments due this year — and the guide to it is the guide to the debt service coverage ratio. Each single ratio answers one question; the debt-to-EBITDA ratio answers how many years of earnings the whole debt takes.

The snapshot caveat: what the ratio assumes

The ratio is a snapshot, not a forecast. It uses one year of earnings and one pile of debt, and it assumes the earnings will keep coming at the same rate until the debt is gone. Earnings do not always keep coming: a bad year can halve the EBITDA and double the ratio overnight, and a good year can do the opposite. The ratio also says nothing about when the debt falls due — debt due next year is a different problem from debt due in ten years — and nothing about interest rates, cash in the bank, or whether the earnings are cash or accounting. EBITDA is not cash flow, because it leaves out interest, tax, depreciation and amortisation, so a company can show strong EBITDA and still be short of cash.

Traps to avoid

First, the undefined cases. If EBITDA is $0, the ratio is total debt ÷ zero — division by zero — and the ratio is undefined. If total debt is $0 and EBITDA is $0, the ratio is 0 ÷ 0 — and the ratio is undefined. The calculator shows “undefined” with a note in both cases, never a number, never hidden.

Second, the negatives. Negative EBITDA means the company is losing money: at −$50,000 of EBITDA the ratio is −10.00 — the earnings contribution goes negative, and the company is losing money while carrying debt. Negative debt means the company holds more cash than debt: at −$50,000 of debt the ratio is −0.40 — a net-cash position. The calculator shows both figures with notes, never hides them.

Third, the rounding. The ratio is displayed to two decimals, half-up. A ratio that displays as 5.00 can sit below the line: $624,999 of debt gives 4.9999920 — it displays as 5.00 but is below 5.00. A ratio that displays as 3.00 can sit below the line too: $166,667 of EBITDA gives 2.9999940, while $166,666 gives 3.0000120, above it. One dollar of debt or one dollar of earnings is the difference between below the line and above it, and the displayed figure hides it. The page prints the unrounded ratios so the rounding does not mislead you.

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