Company debt: net debt to EBITDA, interest cover and maturities

Debt is not bad in itself: used well, it lets a company grow faster. The problem comes when the business weakens or rates rise and the company cannot pay or refinance. Three measures tell you almost everything: how much debt relative to what it generates, how much it costs and when it matures. We use a fictional company, Example Corp, with the same figures throughout this series, so you can see how the income statement, balance sheet and cash flow fit together.

  • Net debt = financial debt − cash.
  • Net debt / EBITDA: years of EBITDA needed to repay the debt. Above 3–4x calls for caution.
  • Interest coverage (EBIT / interest expense): how many times operating profit covers interest.
  • The maturity schedule reveals refinancing risk in the coming years.
  • Reasonable levels depend on the sector: a regulated utility tolerates more debt than a cyclical tech company.

Example Corp's figures

Using its balance sheet and income statement:

How to interpret net debt to EBITDA

As a general reference:

Interest coverage

Coverage of 6.5x means operating profit could fall by more than 80% before interest could not be paid. Below 3x the margin is thin, and below 1.5x the company depends on nothing going wrong.

Watch interest rates: if debt is floating or matures soon, a rate rise reduces coverage even if the business does not change.

Maturities

Two companies with the same debt can carry very different risks depending on when it must be repaid. The notes to the annual accounts detail the maturity schedule. Look for:

  • Maturities concentrated in one or two years.
  • High short-term debt relative to available cash.
  • The share of fixed vs floating-rate debt.
  • Undrawn credit lines, which provide headroom.

What the ratio does not show

  • Long-term leases work like debt even when presented separately: check whether they are included.
  • Pension obligations can be a significant liability for some companies.
  • EBITDA can swing a lot in cyclical businesses: use an average over several years, not a record year.

Frequently asked questions

What is net debt?

A company's financial debt minus its cash and equivalents — what it would really owe if it used all its cash to repay debt.

What is a good net debt to EBITDA ratio?

Below 2–3x is comfortable in most sectors. Above 4x is high except in very stable or regulated businesses.

What is interest coverage?

Operating profit (EBIT) divided by interest expense. It shows how many times the company can pay its interest.

Is a company with net cash always better?

It is safer, but not necessarily a better investment: too much idle cash can lower returns for shareholders.