It expresses how many years would theoretically take the company to repay the debt if it were using all of the ‘potential’ operating earnings (EBITDA) for this purpose. An index equal to 3 for example, indicates that if the company were to use all of its EBITDA to repay existing borrowings (net of the available cash), it would take about three years to clear them completely.
Limitations to its use
Remember that EBITDA is still an economic indicator that is derived from costs and revenues accounted for on accrual basis. For this reason, it assesses a sort of economic coverage, since it includes revenues and expenses whose monetary realization may occur in a different moment from their economic one. For this reason, even if it provides a useful and easy to calculate indicator (indicates whether the company is able to pay for the acquired financial resources without incurring losses) it should be used with caution in case you want to evaluate the capability of operations to provide the liquidity necessary for the payment of financial charges. For it may happen such cases where, despite a balanced Debt/EBITDA index, there is no coverage from a financial perspective and the company, not having sufficient liquidity, is forced to resort to new funding to provide the necessary resources to pay for installments due.
