Net debt/EBITDA is a financial ratio that is used to measure a company’s debt level relative to its earnings before interest, taxes, depreciation, and amortization (EBITDA). It is a commonly used metric to assess a company’s financial health and its ability to repay its debt obligations.
The ratio is calculated by taking a company’s total debt, including both long-term and short-term debt, and dividing it by its EBITDA. A lower ratio indicates that a company has a lower debt burden and a higher ability to repay its debt, while a higher ratio indicates a higher debt burden and a lower ability to repay debt.
A company with a low net debt/EBITDA ratio is generally considered to be in a stronger financial position than a company with a high ratio. This is because a low ratio indicates that a company’s debt is relatively low compared to its earnings, and it has a stronger ability to generate cash flow to repay its debt.
For example, a company with a net debt/EBITDA ratio of 2 would have twice as much debt as it has earnings before interest, taxes, depreciation, and amortization. While a company with a ratio of 1, would have the same amount of debt as its EBITDA.
Net debt/EBITDA ratio is widely used by investors and analysts as a quick way to evaluate a company’s debt level and overall financial health. It is also commonly used to compare companies within the same industry, as it adjusts for differences in accounting and financing decisions. It’s important though, to keep in mind that this ratio should be used in conjunction with other financial metrics and analysis to get a complete picture of a company’s financial health.
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