Net debt/EBIT divides a company's net debt, its total borrowings minus cash and cash equivalents, by its trailing twelve-month earnings before interest and taxes. It estimates how many years of current operating earnings the company would need to repay its debt after using the cash it already holds.
A multiple of 2.0x means net debt equals two years of EBIT. A negative multiple usually means the company holds more cash than debt, though it can also result from negative EBIT, so the sign has to be read carefully.
The ratio is calculated from figures reported in SEC filings. Net debt comes from the balance sheet: total debt, either reported as one line or summed from short-term and long-term debt, minus cash and cash equivalents, usually tagged CashAndCashEquivalentsAtCarryingValue in XBRL. EBIT comes from the income statement over the trailing twelve months. Neither net debt nor EBIT is a US GAAP line item. EBIT is commonly derived as net income plus income tax expense plus interest expense when it is not reported directly.
Using EBIT rather than EBITDA makes this the stricter of the two net leverage multiples. EBIT is earned after depreciation and amortization, which stand in for the cost of maintaining the asset base, so it better reflects earnings that could genuinely be devoted to paying down debt. For capital-intensive businesses the difference is large: a company can look moderately leveraged on net debt to EBITDA and heavily leveraged on net debt to EBIT.
The ratio assumes all cash is available to repay lenders, which fails for cash held abroad, set aside for a pending deal, or required by regulators. It also becomes unreliable when EBIT is small, since a slight dip in earnings sends the multiple soaring, and meaningless when EBIT is negative. Analysts compare it across peers and against the company's own history, and it does not apply to banks, whose debt and cash are part of their operations.
A: EBIT deducts depreciation and amortization, which approximate the ongoing cost of replacing assets. That makes net debt/EBIT a more conservative leverage measure, especially for companies with heavy equipment or infrastructure.
A: Lower is safer, but acceptable levels depend on the industry and the stability of earnings. The multiple is usually higher than net debt to EBITDA for the same company, so thresholds for the two are not interchangeable.
A: If EBIT is positive, it means the company has more cash than debt. If EBIT is negative, the company is unprofitable at the operating level and the multiple should not be interpreted as leverage.
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