This debt/EBITDA ratio calculator measures the proportion of liabilities against the Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) of a company which characterizes its liquidity position. Below the tool you can find more info on this topic.

Total liabilities:*
EBITDA value:*

## What is Debt/EBITDA ratio?

This is a very often referred to specialized ratio that compares thefinancial borrowings against the Earnings before interest, taxes, depreciation and amortization of a company, as it indicates together with some other figures how stable from financial point of view a company is and which liquidity position it has.

In a more specific way it demonstrates the ability of a company to repay in due time all of its financial obligations.

In practice it is used to compare the liquidity position of one company with the one of another business or with the average within a given industry.

Creditors, investors and by case rating agencies use the Debt/EBITDA to evaluate whether a company may face default or difficulties in paying off its debts and approximate in a simpler manner how long will it take a company to pay in full all of its debts.

One important aspect to mention is that the Debt/EBITDA ratio should not be the single aspect to analyze when assessing the capability  of a company to pay its debts and when trying to figure out if it has a strategic approach on how its uses external financing sources.

## Ratio formula

The debt/EBITDA ratio is obtained by dividing the debts by the Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA). The calculations can be made either by hand or by using this debt/EBITDA ratio calculator.

Debt/EBITDA ratio = Total Liabilities / EBITDA

## Interpretation of the levels of the Debt/EBITDA Ratio

Auditors and financial experts state that a lower debt/EBITDA ratio is a positive signal that the entity in question has sufficient financial resources to cover its obligations in due time; while a higher debt/EBTIDA ratio may indicate that the business relies too much on debts and if might face difficulties in paying off its liabilities.

• Financial analysts agree that a Debt/EBITDA ratio less than 3 is desirable.
• Any ratio higher than 4 or 5 indicates an increased likelihood for the company to encounter difficulties in dealing with its liabilities and problems in getting new loans to finance its activity further on.

Another aspect to mention about is that the Debt/EBITDA ratio has a direct impact on the credit score a company has in the eye of a creditor, thus the higher this proportion is the lower the credit score will be, while the lower the ratio is the better.

## Example of a calculation

Company A has total liabilities of \$100,000 and an EBITDA of \$35,000. Which is the level of the Debt/EBITDA ratio?

Answer: Debt/EBITDA Ratio = \$35,000/\$100,000 = 2.86

18 Apr, 2015