Blog · Finance metrics and formulas · Finance and FP&A teams
Net debt to EBITDA subtracts eligible cash from defined borrowing before comparing it with trailing earnings. This guide works through the cash policy, debt and earnings rows, a repayment example and the checks that make leverage comparisons useful.
Net debt to EBITDA, often searched as net debt EBITDA, is debt less eligible cash divided by trailing EBITDA. It shows leverage after a defined cash offset. The calculation only helps if the cash can be identified, the debt perimeter is consistent and the earnings period matches the measurement date.
Net debt = Gross debt − Eligible cash and cash equivalents
Net debt to EBITDA = Net debt / Trailing twelve-month EBITDA
Gross debt, eligible cash and EBITDA are defined inputs. Different companies and credit agreements can draw their boundaries differently, so avoid treating a familiar label as proof that two ratios are comparable.
For this article's management measure, gross debt includes outstanding borrowing principal and finance lease liabilities. Eligible cash is unrestricted cash and cash equivalents available within the same group, less an explicitly stated minimum operating reserve. This reserve is a management policy for the example; it is not a universal accounting requirement or covenant rule.
Restrictions deserve their own column. SEC balance-sheet rules require separate disclosure of cash restricted as to withdrawal or usage. That disclosure helps identify a restriction; it does not decide whether a particular credit agreement permits the cash offset.
The financial KPIs overview places net leverage among other finance measures. Here the focus is the cash eligibility schedule and the calculation underneath the headline.
Use one closing date for the borrowing schedule and cash schedule. Keep the entity, account, currency, balance and inclusion reason on each row. For a consolidated calculation, eliminate intragroup debt and avoid counting the same cash in both a subsidiary schedule and a group summary.
The cash file should identify restricted accounts, pledged balances, customer funds the company cannot use and balances unavailable to the included borrowers. If management deducts an operating reserve, show that reserve separately. A blank availability field needs investigation; it should not default to eligible.
Obtain twelve months of net income, interest, income taxes, depreciation and amortization from the same reporting group. The SEC's EBITDA guidance, Questions 103.01 and 103.02, starts the standard reconciliation at net income and distinguishes differently calculated adjusted measures. Keep a separate bridge for any covenant add-backs.
A hypothetical US equipment distributor prepares a management calculation at September 30, 2026. All amounts are in USD. Operating lease liabilities are outside its stated debt policy.
| Borrowing schedule row | Included debt (USD) |
|---|---|
| Drawn revolver | 1,500,000 |
| Term loan: current portion | 900,000 |
| Term loan: noncurrent portion | 5,100,000 |
| Finance lease liabilities | 1,500,000 |
| Gross debt | 9,000,000 |
The cash schedule distinguishes bank balances from the amount management allows as an offset.
| Cash eligibility step | Calculation | Amount (USD) |
|---|---|---|
| Unrestricted cash and cash equivalents | Bank and qualifying cash-equivalent balances | 2,100,000 |
| Restricted deposits | Separate restricted accounts | 400,000 |
| Total cash balances reviewed | 2,100,000 + 400,000 | 2,500,000 |
| Remove restricted deposits | 2,500,000 − 400,000 | 2,100,000 |
| Remove minimum operating reserve | 2,100,000 − 300,000 | 1,800,000 |
The reserve is a policy input, not an additional bank account. Recording it as another cash balance would double count cash. Keep evidence for the restriction and the documented reserve alongside the schedule.
The trailing earnings bridge is:
| Earnings row: twelve months ended September 30, 2026 | Amount (USD) |
|---|---|
| Net income | 1,250,000 |
| Interest expense | 450,000 |
| Income tax expense | 400,000 |
| Depreciation and amortization expense | 900,000 |
| EBITDA: sum of the four rows | 3,000,000 |
Now work both leverage measures from the same inputs.
| Measure | Calculation | Result |
|---|---|---|
| Net debt | 9,000,000 − 1,800,000 | 7,200,000 USD |
| Gross debt to EBITDA | 9,000,000 / 3,000,000 | 3.00x |
| Net debt to EBITDA | 7,200,000 / 3,000,000 | 2.40x |
Amounts are shown in whole dollars; multiples are rounded to two decimal places. The gross debt to EBITDA formula explains the borrowing numerator without the cash offset, while the debt to EBITDA ratio guide covers its broader interpretation.
Two identities should hold before anyone comments on leverage:
Gross debt = Net debt + Eligible cash
Net leverage × EBITDA = Net debt
Here $7,200,000 + $1,800,000 = $9,000,000, and 2.40 × $3,000,000 = $7,200,000. Reconcile the borrowing rows to the balance-sheet debt accounts, with documented carrying-value differences, and tie the cash rows to the corresponding bank and ledger balances.
Subtracting all reviewed cash would instead give $6,500,000 of net debt: $9,000,000 − $2,500,000. Dividing by $3,000,000 gives 2.17x, rounded. The difference comes entirely from the $700,000 of restricted cash and reserve excluded by policy: $400,000 + $300,000. It does not represent better earnings or less borrowing.
Assume the company pays $500,000 of term-loan principal from unrestricted cash. The reserve remains unchanged, no other balance moves and EBITDA remains $3,000,000.
| Measure | Before repayment | After repayment |
|---|---|---|
| Gross debt (USD) | 9,000,000 | 8,500,000 |
| Eligible cash (USD) | 1,800,000 | 1,300,000 |
| Net debt (USD) | 7,200,000 | 7,200,000 |
| Gross debt to EBITDA | 3.00x | 2.83x |
| Net debt to EBITDA | 2.40x | 2.40x |
Debt and eligible cash each fall by $500,000. The company reduced gross borrowing, but its net debt is unchanged. This is why a treasury report should show the numerator components alongside the multiple.
If the question instead concerns borrowing relative to the equity base, use net debt to equity. It answers a different question and requires a different denominator.
Bring your borrowing schedule, cash eligibility file and trailing earnings export; Covirage maps the columns, and its tools compute and check the supplied balances and earnings while the external AI model explains the result with every figure traced to its rows. Create a free Covirage account and bring a sample of your own data.
See Covirage for finance teams for the reporting context around those files.
It depends on the definition being reported. A management liquidity view may exclude cash that cannot repay the included debt, while a covenant has its own wording. Show restricted balances separately and document why each balance is included or excluded.
With positive EBITDA, a negative numerator means eligible cash exceeds included debt. That can indicate a net cash position, but check the cash restrictions, debt perimeter and operating cash requirements before interpreting the result as surplus liquidity.
If repayment uses cash already deducted in net debt, debt and eligible cash fall by the same amount. Net debt therefore stays unchanged. Gross leverage falls, while net leverage stays the same if EBITDA and the cash policy are unchanged.
No. Net debt to EBITDA compares a balance with earnings. Debt service coverage compares a defined cash or earnings measure with principal and interest due during a period. Payment dates and cash generation require a separate schedule.