Net Debt/EBITDA ratio is a financial ratio which measures the levearge of a company and its ability to meet debt obligations. It is a common ratio used by credit rating agencies to assess how likely a company will default on its debt. The formula for calculating the Net Debt/EBITDA ratio is as follows:
Net Debt/EBITDA = (Short-term Debt + Long-term Debt - Cash and Cash Equivalents) / EBITDA
A low Net Debt/EBITDA ratio is usually preferred by credit analysts because it tells that the company is not highly leveraged and has the ability to repay debt obligations. A company with a high Net Debt/EBITDA ratio is highly leveraged and is likely to have a lower credit rating. This would lead to a higher yield on bond to compensate for the higher default risk.
