2
$\begingroup$

I am looking for some kind of guidance what is generally considered a high or low ratio of Debt-to-Earnings before interest, tax, depreciations and amortisations (EBITDA). In a recent article by The economist - "America's companies have binged on debt; a reckoning looms" [1] from March 8th 2018, a highly leverage company is defined as having a ratio greater than 5.

I would like to find some academic literature or analysis on the different categories which might exist for this ratio. Or is it just a subjective measure, probably relative to some industries known for low levels of leverage.

[1] https://www.economist.com/news/business/21738397-total-debt-american-non-financial-corporations-percentage-gdp-has-reached

$\endgroup$
2
$\begingroup$

It is mainly subjective, depends on country and sector. E.g. when I worked in private equity in a distressed fund a highly levered company was a company with a net-debt to EBITDA ratio > 7.0.

Those are back of the envelope numbers. They actually do not tell you much about the health of the company nor its risk. A company with 7.0x net-debt to EBITDA ratio might be safer for debtholders than a company with 3.0x net-debt to EBITDA ratio if it has more stable cashflows or more collateral.

In any case, the article you mention looks at net debt to EBITDA this is important as it subtracts the cash the company has.

Proper academic work would will look mainly at leverage to value ratios and leverage to cashflow. Not really to net-debt as most models assume there is no role for cash-holdings (there are few exceptions to this). Still you won't find any study with a clear cut in terms of categories for net debt to ebitda ratios. Those are mainly subjective and meant to be used mostly in cross firm/industry comparisons just as in the economist article you mention.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.