Debt capacity check
A few figures are enough to see whether a company is healthy or overleveraged for its sector and country.
Sector
Country
Healthy
Debt looks comfortable for this sector, with room to take on more.
Net debt / EBITDA
2,5x
Net debt €25,0m
Interest cover
5,0x
EBITDA / interest
Years to repay
4,2
Net debt / (EBITDA − capex − interest)
Room for more debt
€10,0m
Up to 3,5x EBITDA
Net debt / EBITDA for this sector
- Healthy: up to 2,5x
- Moderate: up to 3,5x
- High: up to 4,5x
- Overleveraged: above 4,5x
If EBITDA falls
| EBITDA drop | Net debt / EBITDA | Result |
|---|---|---|
| −10 % | 2,8x | Moderate |
| −20 % | 3,1x | Moderate |
| −30 % | 3,6x | High |
A quick sanity check, not a credit opinion. The general limits rest on the public references below; the adjustments by sector and country are Dealith assumptions.
Public references: BCG Transform Index (above 4.5x, sub-performing debt), ICG (European private companies: 4.8x median, 2.6x interest cover, Q3 2024).
What is debt capacity?
Debt capacity is how much debt a company can carry and repay from its own cash without putting the business at risk. Lenders and investors look first at two ratios: net debt to EBITDA, which measures the size of the debt, and interest cover, which measures the cost of paying for it.
Net debt to EBITDA formula
Net debt = Financial debt − Cash
Leverage = Net debt / EBITDA
Interest cover = EBITDA / Annual interest
Years to repay = Net debt / (EBITDA − Capex − Interest)
Leverage shows how many years of EBITDA the debt represents. Years to repay is more demanding, because it counts only the cash left after capex and interest.
How to calculate it: an example
A company has an EBITDA of €10m, €30m of debt and €5m of cash. Its net debt is €25m, or 2,5x EBITDA. With €2m of interest, cover is 5,0x. After €2m of capex and the interest, €6m a year is left, so repaying the debt would take about 4,2 years.
What is a good net debt to EBITDA ratio?
As a general guide, this page treats up to 2,5x as healthy, up to 3,5x as moderate and up to 4,5x as high, adjusting each limit for sector and country. BCG treats debt above 4,5x as sub-performing. ICG reports a median of 4,8x for European private companies, but those are already leveraged companies, not a market average.
What is a good interest cover ratio?
This page reads cover as strong from 4x, acceptable from 2,5x, tight from 1,5x and weak below that. The verdict takes the worse of the two ratios, because a company can look fine on leverage and still struggle to pay expensive debt.
What happens if EBITDA falls?
Debt stays the same when earnings drop, so leverage rises. In the example above, a 20 % fall in EBITDA takes it from 2,5x to 3,1x, and a 30 % fall to 3,6x. It is worth testing that before adding more debt: the table on this page does it for you.