Debt to EBITDA
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What is Total Debt to EBITDA?
Total Debt to EBITDA compares total debt to Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), assessing a company’s ability to service its debt.
How do you interpret Total Debt to EBITDA?
Total Debt to EBITDA compares total debt to Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), assessing the company’s ability to service its debt from operational earnings.
How to Calculate Total Debt to EBITDA?
It is calculated by dividing the total debt of a company (including both short- and long-term debt) by its EBITDA.
Total Debt to EBITDA = Total Debt / EBITDA
where - Total Debt includes both short-term and long-term liabilities.
- EBITDA represents earnings before interest, taxes, depreciation, and amortization.
Why is Total Debt to EBITDA important?
This ratio is important because it assesses the company’s ability to meet its debt obligations with its operational earnings, which helps investors and creditors evaluate the company's financial health and risk level.
How does Total Debt to EBITDA benefit investors?
Investors use this ratio to assess the financial risk of a company. A high Total Debt to EBITDA ratio might indicate that a company is over-leveraged, which could be risky in a downturn. A lower ratio suggests the company is less reliant on debt, which could make it more resilient.
Using Total Debt to EBITDA to Evaluate Stock Performance
A lower Total Debt to EBITDA ratio can be seen as a positive indicator for stock performance, as it suggests the company has better control over its debt and financial risk. Higher ratios may signal potential issues with liquidity and financial flexibility.
FAQ about Total Debt to EBITDA
What is a Good Total Debt to EBITDA?
A good ratio varies by industry, but generally, a ratio below 3x is considered strong, while a ratio above 4x might indicate higher financial risk. Capital-intensive industries may tolerate higher ratios.
What Is the Difference Between Metric 1 and Metric 2?
Total Debt to EBITDA measures overall debt relative to operational earnings, while Interest Coverage Ratio measures how well a company’s earnings cover its interest payments. Both provide insights into leverage but from different perspectives.
Is it bad to have a negative Total Debt to EBITDA?
A high Total Debt to EBITDA can indicate financial stress or over-reliance on debt, increasing the company’s vulnerability to economic downturns or rising interest rates.
What Causes Total Debt to EBITDA to Increase?
The ratio increases if a company takes on more debt or if its EBITDA decreases due to declining earnings, increasing the leverage risk.
What are the Limitations of Total Debt to EBITDA?
The ratio does not consider the timing of debt maturities or interest rates, and it assumes EBITDA remains constant, which may not always be the case during fluctuating market conditions.
When should I not use Total Debt to EBITDA?
It may not be useful for companies with low or negative EBITDA, such as early-stage companies or highly capital-intensive firms with large depreciation expenses.
How does Total Debt to EBITDA compare across industries?
The acceptable range for this ratio varies significantly across industries. Capital-intensive industries, such as utilities, may have higher acceptable ratios, while service industries or technology companies generally have lower ratios .
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