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Glossary

Debt/EBITDA

Category — Financial Statements
Debt/EBITDA is the ratio used in financial analysis to determine the level of the company’s debt load.

The indicator shows the ratio of the total debt to earnings before interest on loans, income tax, depreciation and amortization (EBITDA).

This ratio shows how long the company will be able to fulfil its obligations directing all its net cash flow to their repayment. The higher is the value of the indicator, the greater is the level of the debt load, and hence the risk of failure to fulfil financial obligations.

Both values of the indicator (Debt, EBITDA) are calculated based on the company’s financial statements. There are no officially normal values of the ratio, however, in international practice, the Debt/EBITDA ratio is ≤ 3, is considered "normal". Companies that have the Debt/EBITDA ratio which is 4–5 (depending on the industry) show a high debt load and, as a rule, have difficulties with paying off existing debt and then raising borrowed funds.

In practice, the Debt/EBITDA indicator is used by a wide range of people, from rating agencies, credit specialists and investment bankers to the company’s management and its shareholders. Using this indicator, you can get an idea of the company’s financial stability by comparing the selected value with the industry average.
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