Definition of net debt
Net debt is the difference between a company's total financial liabilities and its available cash. It represents the real level of debt, net of the liquidity that could be mobilised immediately for repayment.
Beware of non-financial liabilities: only include financial liabilities (bank loans, bonds, finance leases) — not trade payables, tax liabilities or provisions. In financial databases, use longTermDebt + shortTermDebt for debt, and cashAndCashEquivalents for cash.
The net debt / EBITDA ratio
Relating net debt to EBITDA gives a measure of repayment capacity expressed in years:
| Net debt / EBITDA | Interpretation | Screener score |
|---|---|---|
| < 0 (negative) | Net cash — more cash than debt. Maximum strength. | 10 / 10 pts |
| 0 – 1x | Very low debt — healthy, plenty of headroom | 8 / 10 pts |
| 1 – 2x | Moderate debt — fine for a cyclical or growing small cap | 5 / 10 pts |
| 2 – 3x | Significant debt — keep an eye on it. Vulnerable to a downturn. | 2 / 10 pts |
| > 3x | High debt — real financial risk. Typical bank covenant reached. | 0 / 10 pts |
Net debt / EBITDA calculator
A reminder: what is EBITDA?
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is operating profit before deducting depreciation and amortisation. It is a proxy for the gross ability to generate operating cash, before the effects of investment policy (depreciation) and financing (interest).
Why use EBITDA rather than net income to measure leverage? Because depreciation is a non-cash charge — EBITDA is a better proxy for the cash available to repay debt. Most bank covenants are also defined on EBITDA.
Sector thresholds and context
Acceptable levels of debt vary with the nature of the sector and the visibility of cash flows:
| Sector | Comfortable leverage | High leverage | Comment |
|---|---|---|---|
| SaaS / Software | < 1x | > 2x | Recurring cash flows allow moderate leverage |
| Light industry | < 1.5x | > 3x | Sensitive to cycles — favour low leverage |
| B2B services | < 1.5x | > 3x | Asset-light — leverage should stay low |
| Retail | < 2x | > 4x | Sector with negative working capital — higher leverage tolerated |
| Real estate / Property | < 6x | > 10x | Tangible assets as collateral — structurally high leverage |
The special case of acquisitions: a small cap that has just made an acquisition may temporarily show leverage of 3-4x. This is not necessarily alarming if the deleveraging plan is clear and the combined group's cash generation is solid. Look at the trajectory over 2-3 years rather than a single point.
Warning signs to watch
- Leverage rising year on year despite stable EBITDA — debt is increasing without operating improvement.
- Renegotiation of bank covenants mentioned in the annual report — a sign that the banks are concerned.
- Large floating-rate debt in a rising-rate environment — financial charges increase mechanically.
- No detail on debt maturities in the notes — be wary of short-term liquidity.
- EBITDA well above Free Cash Flow — EBITDA is flattering but real cash is lower (high working capital, heavy capex).
Go further: the Fundamental Analysis cluster
New to screening European small caps? See the European small-cap stock screener guide and the glossary.