NIBD/EBITDA

NIBD/EBITDA shows how large the debt burden is in a company. It gives a measure of the minimum number of years a company would need in order to repay its interest-bearing debt. The figure is calculated by dividing net interest-bearing debt (NIBD) by EBITDA. NIBD is interest-bearing debt less cash and cash equivalents (near-cash assets), and shows how much interest-bearing debt a company has left after making the largest possible repayment out of the cash and the readily realisable assets it holds. By dividing this value by EBITDA — operating profit before depreciation and impairment, that is, before tax, interest costs, depreciation and impairment — you get an approximate figure for how many years a company needs in order to repay its interest-bearing debt, assuming it uses its entire EBITDA each year for that purpose. That is a simplification: in practice EBITDA also has to cover tax, interest and investment, so the real repayment period is longer.

How do you calculate NIBD/EBITDA?

NIBD/EBITDA is calculated by dividing net interest-bearing debt (NIBD) by EBITDA.

EBITDA (operating profit before depreciation and impairment) is income after all costs have been deducted apart from impairment, depreciation, interest expenses and tax. It is therefore not the same as the operating profit (EBIT), which is after depreciation and impairment.

NIBD (net interest-bearing debt) is the total debt a company has on which it pays interest, less cash and cash equivalents. The cash is thus already deducted within NIBD, and must not be deducted a second time in the ratio.

NIBD/EBITDA = NIBD / EBITDA

What can NIBD/EBITDA be used for?

NIBD/EBITDA is about debt burden and earnings, and about risk assessment. It shows how many years a company would need in order to repay its interest-bearing debt, and is a measure of how large a debt burden a company carries relative to income from operations. This says something about profitability, in the sense of how good a company is at generating sufficient sales revenue. A higher debt burden can mean lower profitability, since it shows greater debt with fewer potential funds for repayment, but it can also mean that the company is taking on high risk in pursuit of a higher return. The key figure can therefore be useful for risk assessment, since it says something about the relationship between debt and equity. Debt that is higher than equity brings both a potentially greater return and higher risk.

The value of NIBD/EBITDA depends on which company and which industry is being analysed. In the property sector, NIBD/EBITDA is often high; a value of 5 may indicate that the business operates with a great deal of debt relative to equity in order to achieve a higher return, which also brings higher risk. For a less capital-intensive company, a value of 5 says more about the debt burden being five years than it does about risk. A high NIBD/EBITDA often occurs in start-up companies, since they often have limited income and high debt.

A company with low interest-bearing debt or a high cash balance may end up with a value below 1, either because it has low debt relative to how much it is able to repay thanks to high earnings, or because it has large cash holdings with which to repay the debt. A low NIBD/EBITDA often occurs in more mature companies, since they often have higher income and less debt.

Tips for increasing or reducing NIBD/EBITDA

Whether you want a high or a low NIBD/EBITDA depends on the industry, the company strategy and the capital structure. Unless the company operates in an industry where a high debt burden is advantageous, a low NIBD/EBITDA is usually the most favourable.

To reduce NIBD/EBITDA it can be useful to review the profitability of operations. If you succeed in achieving higher income, EBITDA increases, and NIBD/EBITDA is thereby reduced.

1. Pricing. Consider how the product is priced relative to competitors.
2. Marketing. How effective is the marketing strategy?
3. Supply and demand. Examine the market and whether the product meets supply and demand.
4. Quality. Consider how the quality of the product compares with competitors.
5. Customer service. Consider how good the company's customer service strategy is.
6. Customer surveys. What do customers say about the product?
7. Efficiency. Examine how efficient the company is in product development, production and sales.
8. Products. Which products sell best, and why?
9. Customers. Examine how good the company is at retaining customers, and why.
10. New customers. Examine how good the company is at winning new customers, and why.

Advantages and disadvantages

NIBD/EBITDA is a debt-specific key figure that can be used to assess financial stability on the basis of the ability to repay debt. The key figure can be advantageous for companies with a lot of interest-bearing debt, and is useful for seeing whether changes in the cash balance or in EBITDA affect the company's debt burden. It is also a good indicator of how large a proportion of debt relative to equity a company should have in order to sit at its desired level of risk. NIBD/EBITDA can be used both in the short and the long term, depending on whether you focus on current liabilities alone or on both current and non-current liabilities.

The key figure does, however, assume that a company uses its entire EBITDA each year to repay debt, which is not the case for most companies. No account is taken of EBITDA also having to cover tax, interest and new investment. It is therefore reasonable to assume that the actual repayment period for a company's debt is often longer than NIBD/EBITDA suggests. It is also assumed that the cash balance and EBITDA are held at the same level until the end of the repayment period, which means that any drastic change in the cash balance or in EBITDA can give an artificial value for the key figure. If a company raises liquid funds in order to make an investment, NIBD/EBITDA falls, even though in reality the cash is not going to be used to repay debt. The opposite happens if a company spends all its cash on investments: even though this increases NIBD/EBITDA, the investment may lead to higher earnings in the future, which in turn implies a lower NIBD/EBITDA value.

If you want to assess a company on the basis of NIBD/EBITDA, it is useful, among other things, to see it in the context of the company's capital structure and future plans. It is also worth considering how long the company has been trading, as a reference point for the key figure.

NIBD/EBITDA in different situations

If a company takes on more interest-bearing debt over time, this can lead to a rising NIBD/EBITDA. In such a case it can be useful to review the company's earning capacity, as described above.

If a company's cash and cash equivalents increase over time, this leads to a falling NIBD/EBITDA. If the company does not plan to invest these funds, it may be a good idea to use a portion of them to repay debt.

If a company's EBITDA increases over time, this can lead to a falling NIBD/EBITDA, provided the company does not take on more debt. This is an optimal situation for a company that wishes to repay its debt.

Example: reducing NIBD/EBITDA

To illustrate the use of NIBD/EBITDA in the context of reductions, we can take the example of a technology company in an early growth phase with net interest-bearing debt of 8,000 MNOK — that is, interest-bearing debt less cash and cash equivalents — and EBITDA of 500 MNOK. This gives a NIBD/EBITDA of 8,000 MNOK / 500 MNOK = 16. In theory this means that the company needs a minimum of 16 years to repay its interest-bearing debt.

If the company wishes to reduce this value, it can try to increase its top line. If the business manages to increase the top line by 4% each year for five years, and at the same time reduce net interest-bearing debt by 4% each year over the same period, the NIBD/EBITDA value after five years becomes:

NIBD: 8,000 MNOK × 96%⁵ = 6,523 MNOK

EBITDA: 500 MNOK × 104%⁵ = 608 MNOK

NIBD/EBITDA = 6,523 MNOK / 608 MNOK = 10.7

The company has now reduced NIBD/EBITDA by around a third, which means that it now needs only a further 10.7 years to repay the debt, assuming this year's situation is held constant.

Read more about how the key figures in Capassa calculate NIBD/EBITDA and other debt-related key figures automatically.