What is indicated by the debt/EBITDA ratio?

The debt/EBITDA ratio is a key financial metric that indicates a company's ability to pay off its incurred debt. Specifically, it measures a company's total debt relative to its earnings before interest, taxes, depreciation, and amortization (EBITDA). A higher ratio suggests that a company may be more leveraged, meaning it has taken on more debt in relation to its earnings, which can increase the risk of defaulting on its obligations.

This ratio is commonly used by lenders and investors to assess a firm's financial health and capacity to manage and repay its debts. If a company has a very high debt/EBITDA ratio, it might indicate potential difficulties in making payments, leading to a higher likelihood of default. Therefore, this ratio directly correlates to a company's credit risk and financial stability.

In contrast, the other alternatives do not pertain to the debt/EBITDA ratio. Total revenue, percentage of ownership, and the growth rate of net income focus on different financial aspects and objectives, making them irrelevant to measuring debt servicing capability.