Total Debt To EBITDA
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What is Total Debt to (EBITDA - Capex)?
Total Debt to (EBITDA - Capex) compares total debt to EBITDA minus capital expenditures, assessing the ability to service debt after necessary reinvestments.
How do you interpret Total Debt to (EBITDA - Capex)?
Total Debt to (EBITDA - Capex) assesses the ability to service debt after accounting for capital expenditures, focusing on the cash available for debt repayment.
How to Calculate Total Debt to (EBITDA - Capex)?
The ratio is calculated by dividing the company's total debt by EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) minus capital expenditures (Capex).
Total Debt to (EBITDA - Capex) = Total Debt / (EBITDA - Capex)
where
- Total Debt: The sum of all short-term and long-term debt.
- EBITDA: Earnings before interest, taxes, depreciation, and amortization, which represents the company's operating performance.
- Capex: Capital expenditures, which are funds used by the company to acquire or upgrade physical assets.
Why is Total Debt to (EBITDA - Capex) important?
It’s an important measure because it accounts for the operational cash flow available after reinvesting in business assets, which can provide a more realistic view of the company’s debt servicing ability. It’s particularly useful for assessing companies with high capital expenditures.
How does Total Debt to (EBITDA - Capex) benefit investors?
Investors use this ratio to understand the actual cash flow a company generates, after capital investments, to meet its debt obligations. A company with a high ratio may be taking on too much debt relative to its operational cash flow, posing a higher risk for investors.
Using Total Debt to (EBITDA - Capex) to Evaluate Stock Performance
A lower Total Debt to (EBITDA - Capex) ratio suggests that a company has more efficient debt management, which is favorable for long-term stock performance. Investors may avoid companies with higher ratios, as they could face debt servicing challenges, particularly in downturns.
FAQ about Total Debt to (EBITDA - Capex)
What is a Good Total Debt to (EBITDA - Capex)?
A good ratio depends on the industry, but typically, a lower ratio (e.g., below 2x) is considered safer as it indicates the company generates sufficient operational cash flow after Capex to cover its debts.
What Is the Difference Between Metric 1 and Metric 2?
Debt to EBITDA measures the company's ability to pay off its debt purely based on operating performance, while Total Debt to (EBITDA - Capex) accounts for capital expenditures, providing a more conservative measure of cash flow available for debt repayment.
Is it bad to have a negative Total Debt to (EBITDA - Capex)?
A negative ratio indicates that the company is not generating enough EBITDA to cover its capital expenditures, let alone repay its debt. This could signal severe financial difficulties.
What Causes Total Debt to (EBITDA - Capex) to Increase?
The ratio increases when either the company takes on more debt, EBITDA decreases, or capital expenditures increase, all of which can indicate higher leverage and financial stress.
What are the Limitations of Total Debt to (EBITDA - Capex)?
The ratio does not consider the timing of debt repayments or the nature of capital expenditures, whether they are discretionary or mandatory. It may not provide the full picture of liquidity if significant debt repayments are due shortly.
When should I not use Total Debt to (EBITDA - Capex)?
This metric may not be useful for companies with irregular capital expenditures or those in industries where capital investments fluctuate heavily. It’s also less relevant for companies with minimal capital needs, such as those in the tech or service sectors.
How does Total Debt to (EBITDA - Capex) compare across industries?
Capital-intensive industries, such as manufacturing or utilities, often have higher ratios due to significant capital expenditure needs, while service-oriented industries usually have lower ratios because they require fewer physical assets.
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