Debt to EBITDA ratio (Debt/EBITDA) for Stock Analysis - YouTube

Hey guys

Victor here with Individual Investor 

so far we have discussed three financial ratios  

that incorporate debt

in order to evaluate the financial health of a company  

these are the debt to equity ratio

the current ratio

and the working capital

what I want to do now

is to discuss another ratio that helps us  

determine the ability of a company to repay  

its financial obligations based on earnings 

This is called the debt to EBITDA ratio

debt to EBITDA ratio is a figure that is primarily  used by lenders

to evaluate if a company is in a good position to repay its debt

and any potential new loans

This is very similar to bank loans

when you apply for a loan through your bank

they will ask you about your annual income

your monthly or

fixed expenses

your existing debt etc

because at the end of the day they want to know if you have  

enough earnings to repay that loan that you are  applying for

The formula is self-explanatory

you simply take the debt and divide it by the EBITDA 

and that gives you the debt to EBITDA ratio

For this example, I will continue to use Facebook  just like I did in my

EBITDA and enterprise value to EBITDA videos

if you haven't watched those videos please go ahead and review them  

and then come back

So here

I have some screenshots from Facebook's 10K form

which is what we used in  the previous videos

So we have the balance sheet

the income statement

and the cash flows over here  

at the bottom

So the first thing we got to do is figure out the total debt

and Facebook turns out  

that they don't have long-term debt

so the only debt that they have is actually the debt from  

the operating lease liabilities

the current lease liabilities

and the non-current lease liabilities

That I have here highlighted in red 

in the balance sheet

so let's just add those up

1.023 billion + 9

.631

Perfect so we have 10.65 billion dollars in total debt

That's it

for EBITDA

we're going to need the operating income  

and then we need to add the depreciation and amortization  

so the operating income that's in the statement of income

here we have it in the second screenshot  

you can see here again inside the red box

The income from operations that's 32 billion (point) six  seven one dollars

So, that's 32.671

perfect

and then depreciation and amortization that's in the  

statement of cash flows so if we scroll down here 

in the last screenshot we see here depreciation  

and amortization and that's 6.862

perfect

and now EBITDA will be equal to the operating income plus depreciation  

and amortization

and perfect that gives us a total of 39.533 billion dollars in  

EBITDA and then finally all we have to do here

is divide the total debt by the EBITDA  

and there we go we get a debt to EBITDA ratio of 0.3

as you can see the debt to EBITDA ratio for Facebook is very small

0.3  

this means that 

Facebook doesn't have any issues at all in terms  of paying off their debt and financial obligations  

given the EBITDA that they generate

it is also important to compare the debt to EBITDA ratio  

over multiple periods of time 

Ideally, you want to see the debt to EBITDA ratio decrease over time 

or at least remain flat or constant

if the debt to EBITDA ratio increases period after period

this could mean that the company is either borrowing  more money

or that the EBITDA is decreasing over time

Time and to wrap this up

normal ratios range from 3 to 10 in normal circumstances

but as always please remember to always benchmark your ratios with industry standards  

Thank you so much guys for joining

please leave any questions comments in the  section below

and if you can like and subscribe to my channel

I will be very very grateful

Thank you for joining and I'll see you next time