The number of years it would take to pay off net debt using EBITDA. Below 2 is healthy. Above 4 raises concern about the company's ability to manage its obligations. A negative value means the company has more cash than debt.
Formula
Description
Measures how many years of EBITDA it would take to pay off net debt. This is the most commonly used leverage ratio in corporate credit analysis and bond covenants. It accounts for cash on hand, giving a more accurate picture than gross debt alone.
Interpretation
Below 2 is healthy. Between 2-4 is moderate. Above 4 raises concern about the company's ability to service its obligations. Negative values mean the company has more cash than debt, which is very strong.
Related Quality Indicators
The percentage of revenue left after paying all operating expenses but before interest and taxes. This shows how efficiently the core business runs. Above 15% is generally strong. Consistently expanding margins signal improving business quality.
The percentage of every revenue dollar that becomes bottom-line profit after all expenses. Above 10% is strong for most industries. Persistently high net margins often indicate a company has a competitive moat protecting its business.
Profitability before the effects of debt, taxes, and depreciation. Useful for comparing companies across different tax jurisdictions and capital structures. Above 20% is generally strong. Often used in merger and acquisition analysis.
The percentage of revenue that converts to free cash flow. This is arguably the most honest profitability metric because free cash flow is difficult to manipulate. Above 10% is strong. Capital-light businesses like software companies tend to have the highest FCF margins.
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