The Question
Total debt divided by EBITDA gives a simple multiple — how many years of current earnings it would take to pay off all outstanding debt, in theory. Businesses often quote this number confidently, having calculated it from their own P&L. Lenders arrive at a different number more often than not, because their version of EBITDA and their version of debt both go through adjustments the business's own calculation usually skips.
Understanding those adjustments matters more than memorising a target ratio, because the "good" number varies enormously by sector, and a business that doesn't know how a lender will adjust its EBITDA can walk into a credit conversation expecting a ratio the lender simply doesn't see.
What EBITDA Hides
EBITDA strips out interest, tax, depreciation and amortisation — useful for comparing operating performance across businesses with different capital structures, but it also strips out real cash costs.
- Working capital movement isn't captured. A business can show strong EBITDA while its cash is tied up in growing receivables or inventory, leaving far less actually available to service debt.
- Maintenance capex is excluded. Depreciation is added back, but the real cash spend needed to keep existing assets running isn't — a lender often nets this out separately.
- One-off items can inflate or deflate the number. Lenders typically normalise for non-recurring income or expenses to get a cleaner, repeatable earnings base.
What Actually Determines How a Lender Reads the Ratio
- Sector norms shape the benchmark. Asset-heavy, capital-intensive sectors can typically sustain higher multiples than asset-light services businesses, because collateral and cash-flow visibility differ.
- Adjusted EBITDA, not reported EBITDA, drives the real ratio. A lender's own add-backs and deductions can move the ratio meaningfully from what the business calculated internally.
- Gross debt versus net debt changes the number. Whether cash balances are netted against debt affects the ratio, and lenders aren't always consistent about which convention they use.
- The trend matters as much as the level. A ratio that's been declining steadily is read very differently from one climbing toward a covenant threshold, even at the same current value.
- It's one input among several — interest coverage, cash-flow conversion and TOL/TNW are assessed alongside it, not instead of it.
Questions Worth Asking
How would a lender's typical add-backs and deductions change our reported EBITDA?
What's the sector norm for this ratio, and how does our number compare to peers, not a generic benchmark?
Is our ratio trending up, down or flat over the last three years?
Does existing debt already carry a covenanted maximum on this ratio, and how much headroom remains?
How much of our reported EBITDA is actually converting into free cash after working capital and capex?
Are we calculating on a standalone or consolidated basis, and does that match how the lender will view us?
Debt-to-EBITDA is a useful shorthand, but it's rarely the number that actually decides a credit outcome on its own — a lender's adjusted version of it, read alongside cash-flow conversion and interest coverage, is what matters. Understanding this correctly, alongside credit rating and financial-risk positioning, is where leverage conversations with lenders actually go smoothly.
Key Takeaways
- A lender's adjusted EBITDA rarely matches a business's own reported figure, due to add-backs, deductions and normalisation.
- There is no single "good" ratio — sector asset intensity and cash-flow stability set the real benchmark.
- The three-year trend matters as much as the current level.
- Debt-to-EBITDA is one input alongside interest coverage and cash-flow conversion, not a standalone gate.
- Existing covenants on this ratio can constrain new borrowing before a new lender is even involved.
Closing Perspective
The more useful preparation isn't memorising a target multiple — it's understanding how a lender's own adjustments are likely to move the number away from what internal reporting shows, and benchmarking against the right sector peers rather than a generic rule of thumb.