Net Debt to (EBITDA - Capex)

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What is Net Debt to (EBITDA - Capex)?

Net Debt to (EBITDA - Capex) compares net debt to EBITDA minus capital expenditures, indicating leverage after accounting for both cash and reinvestments.

How do you interpret Net Debt to (EBITDA - Capex)?

Net Debt to (EBITDA - Capex) measures net debt relative to EBITDA minus capital expenditures, indicating leverage after considering cash needs for reinvestment.

How to Calculate Net Debt to (EBITDA - Capex)?

The ratio is calculated by dividing net debt by EBITDA minus capital expenditures (Capex).

Net Debt to (EBITDA - Capex) = (Total Debt - Cash and Cash Equivalents) / (EBITDA - Capex)

where - Total Debt includes both short-term and long-term debt.

• Cash and Cash Equivalents are liquid assets that can reduce debt.

• EBITDA is earnings before interest, taxes, depreciation, and amortization.

• Capex represents the company’s capital expenditures on assets needed to maintain or grow the business.

Why is Net Debt to (EBITDA - Capex) important?

This ratio is crucial for assessing a company's financial flexibility and long-term sustainability. It is often used to evaluate how efficiently a company can manage its debt obligations after accounting for necessary reinvestments, making it a key indicator of financial health for capital-intensive industries.

How does Net Debt to (EBITDA - Capex) benefit investors?

Investors use this ratio to assess the level of financial risk and leverage a company is exposed to. A lower ratio may indicate that the company has more flexibility to reinvest in growth or return value to shareholders while still being able to service its debt.

Using Net Debt to (EBITDA - Capex) to Evaluate Stock Performance

A balanced or lower Net Debt to (EBITDA - Capex) ratio suggests that the company has strong operational performance and prudent debt management, which could lead to better stock performance. Companies with higher ratios may be viewed as riskier, potentially leading to more volatile stock prices.

FAQ about Net Debt to (EBITDA - Capex)

What is a Good Net Debt to (EBITDA - Capex)?

A good ratio varies by industry, but in general, a ratio below 3x is considered manageable. Capital-intensive industries may tolerate higher ratios, while service or tech industries typically have lower ratios.

What Is the Difference Between Metric 1 and Metric 2?

Net Debt to EBITDA measures leverage based on earnings alone, while Net Debt to (EBITDA - Capex) accounts for the reinvestment needs of the business. The latter provides a more conservative measure of a company’s ability to service debt, as it subtracts essential capital expenditures from EBITDA.

Is it bad to have a negative Net Debt to (EBITDA - Capex)?

A high ratio indicates that the company may struggle to service its debt after reinvesting in the business, especially if capital expenditures are high or if earnings are volatile. This can be a red flag for investors and creditors.

What Causes Net Debt to (EBITDA - Capex) to Increase?

The ratio increases when the company takes on more debt, when EBITDA declines, or when capital expenditures rise significantly. Any of these factors can reduce the company’s ability to repay debt, leading to higher leverage.

What are the Limitations of Net Debt to (EBITDA - Capex)?

This ratio does not account for non-operational factors like extraordinary income or one-time gains. Additionally, it is highly sensitive to changes in capital expenditures, which may fluctuate depending on the company's growth strategy.

When should I not use Net Debt to (EBITDA - Capex)?

This ratio may not be useful for companies with little or no capital expenditure requirements, such as asset-light businesses. It is also less applicable to companies with highly variable cash flows, such as those in early-stage growth sectors.

How does Net Debt to (EBITDA - Capex) compare across industries?

Capital-intensive industries like utilities or telecommunications tend to have higher ratios due to their larger Capex needs, while service-oriented or technology companies typically have lower ratios due to lower capital expenditure requirements​.

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