Debt to EBITDA Calculator (Net Leverage Ratio)
Calculate net debt to EBITDA and total debt to EBITDA, the leverage ratio lenders and rating agencies use, with covenant headroom and spare debt capacity.
How it works
Net debt = total debt − cash · net leverage = net debt ÷ EBITDA · gross leverage = total debt ÷ EBITDA · covenant headroom = 1 − net debt ÷ (covenant × EBITDA) · extra debt capacity = covenant × EBITDA − net debt
Debt to EBITDA estimates how many years of operating cash earnings it would take to repay a company’s debt. Banks write maximum leverage covenants (commonly 3× to 4.5× net debt/EBITDA) into loan agreements, and rating agencies use it as a key input: below about 2× is typical of investment-grade companies, while above 4×–5× usually means high-yield or leveraged-loan territory. The headroom figure shows how far EBITDA could fall before a covenant would be breached.
Worked example
With 5,000,000 of debt, 1,000,000 of cash and 1,600,000 of EBITDA, net debt is 4,000,000 and net debt / EBITDA is 4,000,000 ÷ 1,600,000 = 2.50× (total debt / EBITDA 3.13×) — moderate leverage. Under a 3.5× covenant the company could carry 3.5 × 1,600,000 = 5,600,000 of net debt, so it has 1,600,000 of spare capacity, and EBITDA could fall 1 − 4,000,000 ÷ 5,600,000 = 28.57% before the covenant is breached.
Sources: Investopedia — Debt/EBITDA ratio · Corporate Finance Institute — Net debt to EBITDA
Frequently asked questions
What is a good debt to EBITDA ratio?
It depends on the industry, but under 2× is generally strong, 2×–3× moderate, and above 4× is considered high. Stable, asset-heavy businesses such as utilities can carry more.
Should I use net debt or total debt?
Most loan covenants and analysts use net debt (debt minus cash), but some agreements use total (gross) debt. Check your credit agreement’s definition.
What EBITDA should I use?
Use the last twelve months. Loan agreements usually allow “adjusted” EBITDA that adds back one-off costs; rating agencies make their own adjustments, including leases.
What happens if a covenant is breached?
It is usually an event of default: the lender can demand repayment, but often negotiates a waiver or amendment in exchange for fees, a higher margin or tighter terms.
Related calculators
Educational estimate, not credit, accounting or investment advice. Lenders, auditors and rating agencies adjust these ratios with their own definitions — use the exact definitions in your loan agreement or reporting framework.