Net debt to EBITDA
How many years of current earnings it would take to repay what you owe.
01 What it is
Why anyone looks at this number
How many years of current earnings it would take to repay what you owe.
It is the number your covenants are written against and the one a lender, a rating agency or an acquirer reads first. Headroom here decides how much of the strategy is actually available.
02 The formula
How it is worked out
Net debt to EBITDA = (total_debt − cash_and_equivalents) ÷ EBITDA grain : quarter × entity, rolling 12 months unit : multiple (turns) source : Treasury and the general ledger, joined to the debt register
Use the covenant definition of EBITDA, not the reported one. Permitted add-backs, pro-forma adjustments and which entities are inside the borrowing group are all defined in the agreement, and a number built any other way gives false comfort.
03 Worked example
The same number, with real inputs
| Net debt | €214m |
| EBITDA (LTM) | €68m |
| Covenant limit | 3.5× |
| Calculation | 214 ÷ 68 |
| Result | 3.1× |
Headroom looks like 0.4 turns, but read it the other way: EBITDA can fall to €61m before the covenant breaks. That is a 10% earnings decline, not a comfortable buffer.
04 What moves it
Four things that actually change this number
Earnings
The denominator moves faster than the debt, in both directions.
Working capital
Cash trapped in stock and receivables is debt not repaid.
Capex and acquisitions
Drawn facilities, and earnings that arrive later.
Lease liabilities
Whether the covenant is measured pre- or post-IFRS 16.
05 Where the number lives
The system, the record and the fields
| System of record | Key record | Fields you need |
|---|---|---|
| Treasury and the general ledger, joined to the debt register | Facility and Legal entity | drawn_balance, cash_balance, ebitda_ltm, covenant_definition, test_date, facility_id |
Use the covenant definition of EBITDA, not the reported one. Permitted add-backs, pro-forma adjustments and which entities are inside the borrowing group are all defined in the agreement, and a number built any other way gives false comfort.
06 How it goes wrong
Three ways this metric misleads people
Reported EBITDA rather than the covenant definition
The covenant is tested on a different number and the surprise arrives at the test date.
Fix: Model the covenant definition, with the add-backs, as its own governed metric.Ignoring the earnings side
Leverage is managed by paying down debt while the real risk is an earnings fall.
Fix: Report the headroom as an EBITDA decline percentage, which is what a board can act on.Group view only
A borrowing group inside the structure can breach while the consolidated ratio looks fine.
Fix: Test at the entity level the agreement names.08 Questions
Frequently asked
Which EBITDA period should be used?
Rolling last twelve months, unless the agreement says otherwise. A quarter annualised is volatile and almost never what is being tested.
Should cash really be netted off?
Only cash that is actually available. Trapped cash in jurisdictions you cannot repatriate is not available to repay debt, and most covenant definitions say so.
One definition, everywhere it is used
SCIKIQ stores this metric once and serves it to every dashboard, board pack and agent that asks.