Plain definition
Net debt to EBITDA divides defined net debt by earnings before interest, tax, depreciation, and amortisation for a stated period, often the previous twelve months. It relates borrowing to an operating earnings measure. A result of three times does not mean the debt will be repaid in three years: EBITDA is not cash available for repayment.
Lending agreements can specify their own treatment of cash, leases, exceptional costs, acquisitions, and earnings adjustments. Those definitions determine covenant compliance.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
Net debt of divided by covenant EBITDA of gives 3.0 times. An acquisition adds of net borrowing. If the permitted earnings figure has not changed, leverage rises to 4.0 times.
Management expects the acquired business to improve earnings, but that expectation cannot be inserted into the covenant calculation unless the agreement permits it. The team checks the test date and allowed acquisition adjustments before committing to the funding.
Why it matters
Debt can arrive before its expected benefit. A transaction that looks affordable in next year’s plan may breach a covenant at the next test date. Very low or negative EBITDA also makes the multiple unstable or uninformative.
Practical consequence
Build the calculation from the signed agreement and reconcile every adjustment. Test lower earnings and the timing of new borrowings. Where headroom is insufficient, change the funding mix or obtain the necessary lender consent before drawing; separately check the cash dates for interest and principal.