Total debt/EBIT divides a company's total debt 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 all of its borrowings, without counting any cash it holds.
A multiple of 4.0x means total debt equals four years of EBIT. Higher multiples indicate heavier leverage relative to the earnings available to service debt.
The ratio is calculated from figures reported in SEC filings. Total debt comes from the balance sheet, taken as reported or summed from short-term and long-term borrowings, including lease obligations in GeminIQ's convention. EBIT comes from the income statement over the trailing twelve months. Neither is a US GAAP line item. EBIT is commonly derived as net income plus income tax expense plus interest expense, and it can differ from reported operating income when a company has sizable non-operating gains or losses.
Compared with total debt to EBITDA, this multiple is stricter. EBIT is measured after depreciation and amortization, which approximate the cost of maintaining the asset base, so the ratio reflects earnings that are genuinely free to service debt over time. For telecom, energy, and industrial companies with heavy fixed assets, the gap between the two multiples can be large. Because it uses gross rather than net debt, it also avoids assuming that cash on hand will be applied to repayment, which matters for companies with cash held overseas or committed to other uses.
The multiple becomes unstable when EBIT is small, since a modest earnings decline can double it, and meaningless when EBIT is negative. A single year's EBIT can also be depressed or inflated by one-time items, so analysts often check it against a multi-year average. It is most useful when comparing companies within the same industry, and it does not apply to banks, whose borrowings and interest costs are part of their core business.
A: Total debt/EBIT uses gross borrowings. Net debt/EBIT subtracts cash and cash equivalents first, so it is lower for companies with cash and treats that cash as available to repay debt.
A: EBIT deducts depreciation and amortization, a proxy for the ongoing cost of replacing assets. That makes the multiple a more conservative test of debt capacity, particularly for capital-intensive businesses.
A: It means EBIT was negative, so the company lost money at the operating level. In that case the multiple cannot be read as a repayment period and should be set aside.
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