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Outbyte Driver Updater FREEScan for outdated or missing drivers - takes under a minuteDriver Scan →Outbyte PC Repair FREEClear out junk files and repair common Windows errorsFree Scan →Use debt-to-equity to assess debt relative to shareholders’ equity and a company’s capital structure. Use net debt-to-EBITDA to assess net debt relative to an earnings measure. Neither ratio is a universal leverage score: choose based on the question, check how the company defines each input, and compare like with like.
What question are you trying to answer?
| Your question | More relevant ratio | What it compares |
|---|---|---|
| How much debt does the company have relative to its owners’ equity? | Debt-to-equity | Debt with shareholders’ equity |
| How large is net debt relative to the company’s earnings measure? | Net debt-to-EBITDA | Debt less specified cash with EBITDA |
| Is the company over-leveraged or able to meet its obligations? | Neither on its own | Requires additional measures and business context |
The ratios are complementary, not interchangeable: their numerators and denominators differ. A useful comparison also considers the company’s cash flow, liquidity, debt maturities, interest burden, and industry.
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How to calculate and interpret debt-to-equity
Formula
A common calculation is total debt ÷ shareholders’ equity. The result describes debt in relation to the equity base, making it a capital-structure measure. Definitions of debt can vary; some calculations include fixed payment obligations or other liabilities, so identify what the numerator contains before comparing results. Corporate Finance Institute’s debt-to-equity guide explains the common formula and its interpretation.
When it needs extra care
Very small or negative shareholders’ equity can make the ratio unusually large or difficult to interpret. Don’t read a high figure in isolation: inspect the balance sheet and consider the company’s industry and business model. A single threshold cannot establish that a company is financially sound or distressed.
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How to calculate and interpret net debt-to-EBITDA
Formula
A common calculation is net debt ÷ EBITDA, with net debt typically calculated as total debt less cash and cash equivalents. A company filing hosted by the SEC defines net debt in those terms and describes net debt-to-EBITDA as debt-to-EBITDA calculated using net debt. SEC-hosted issuer filing.
This ratio relates net debt to an earnings measure. It is not literally the number of years a company would need to repay its debt: it does not forecast repayment or establish that earnings will be available to service debt.
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What EBITDA leaves out
EBITDA is often used as a rough proxy for operating performance, but it is not cash available for debt repayment. It excludes interest, taxes, capital expenditure, and working-capital movements. Companies may also use adjusted or issuer-specific EBITDA calculations, so different versions of the ratio may not be directly comparable.
The SEC staff says that when a company presents EBIT or EBITDA as a performance measure, it should reconcile the measure to GAAP net income. See the SEC’s Non-GAAP Financial Measures: Compliance and Disclosure Interpretations.
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What to check before comparing companies
- Debt definition: Check which borrowings and other obligations are included in total debt.
- Cash treatment: For net debt, verify which cash and cash equivalents are deducted and whether any cash is restricted or otherwise unavailable.
- Denominator: Confirm that equity or EBITDA is measured on a consistent basis. For EBITDA, identify any adjustments.
- Period: Align the accounting period and reporting dates; a ratio using one period’s earnings may not be comparable with one using another.
- Purpose and industry: Compare capital-structure questions with debt-to-equity and earnings-relative debt questions with net debt-to-EBITDA, using peers with relevant business models.
- Company or covenant definitions: Issuer presentations and loan covenants may define these terms differently from common shorthand. Use the stated definition and, where needed, reconcile it to reported financial statements.
When neither ratio is enough
Neither measure alone establishes solvency, liquidity, or repayment capacity. For a broader assessment, examine cash flow, available liquidity, the timing of maturities, interest costs, and the company’s operating context alongside the ratios. Treat both as lenses on leverage, not as standalone verdicts.
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