MB Capital Strategies Global

Debt/EBITDA Ratio

MB Capital Strategies Glossary — Updated June 2026

The Debt/EBITDA ratio (also written as Net Debt/EBITDA) tells you how many years a company would need — at its current earnings power — to pay off all its debt. It is the single most-watched leverage metric among lenders, analysts and equity investors in capital-intensive sectors like shipping, mining, pipelines and energy.

Formula

A ratio of 2.0x means the company could theoretically repay all net debt in two years from operating cash flow (before capex and taxes). A ratio of 5.0x means five years — and that is where lenders typically start getting uncomfortable.

Sector Benchmarks (Hard Assets 2026)

Pipelines and LNG carriers can carry more debt than miners or tankers because their revenues are largely contractual — long-term take-or-pay agreements provide predictable EBITDA that lenders trust. Dry bulk and tanker shipping is the most cyclical, so lenders demand lower leverage.

Why It Matters for Dividends

Most shipping companies and miners operate variable-dividend policies tied to cash flow. A rising Debt/EBITDA ratio typically signals one of three things: rates have fallen (EBITDA shrinking), the company made a large acquisition (debt jumped), or both. In either case, the dividend is at risk before the balance sheet is repaired.

Debt/EBITDA vs. Other Leverage Metrics

How to Find It

The ratio is almost never disclosed explicitly on the income statement. You build it from the balance sheet and income statement:

1. Take Total Borrowings from the balance sheet (short-term + long-term debt).
2. Subtract Cash & Short-Term Investments to get Net Debt.
3. Pull EBITDA from the income statement (Operating Profit + D&A), or from the earnings release where it is usually stated explicitly.
4. Divide Net Debt by EBITDA. Most companies also state this ratio in the debt covenant section of their annual report.

Covenant Risk

Many shipping and mining companies have bank loans with Debt/EBITDA covenants — e.g. "ratio must not exceed 4.5x at any quarter-end." A covenant breach triggers a technical default even if the company has not missed a payment. This is why monitoring this ratio quarterly matters: a breach forces renegotiation, often at higher interest rates, and frequently triggers a dividend suspension as the company tries to rapidly reduce debt.

Real-World Examples: Hard Assets 2026

Understanding Debt/EBITDA becomes clearer with concrete examples from the hard-asset universe:

• CMB.Tech (CMBT) — 2026: Net Debt/EBITDA approximately 1.2x in Q1 2026. Strong free cash flow allowed the company to pay both a regular ($0.20) and special dividend ($0.44) in June. Low leverage = high dividend capacity.
• TORM (TRMD) — 2026: Net Debt/EBITDA below 1.0x after aggressive debt reduction. This is why TORM maintained its $0.70 dividend even in softer rate environments. Zero covenant risk.
• Glencore — 2026: Higher leverage (~2.0–2.5x) than tanker peers due to trading operations. Dividend reset in 2024 was partly driven by covenant headroom management during coal price weakness.
• Upstream E&P comparison: Devon Energy and ConocoPhillips both target below 1.0x through the cycle. This discipline is why their variable dividend programs survived the 2023–2024 oil price correction without cuts.

Debt/EBITDA and the Dividend Coverage Triangle

The most complete dividend safety check uses three metrics together:

1. Debt/EBITDA — leverage risk (can they repay debt and pay dividends?)
2. Free Cash Flow Yield — dividend capacity (how much cash is left after maintenance capex?)
3. Dividend Payout Ratio as % of FCF — sustainability (is the payout above 100% of FCF? = red flag)

A company with Debt/EBITDA of 1.5x, 12% FCF yield, and a 60% FCF payout ratio is a well-positioned dividend stock even in a cyclical downturn. A company with 3.5x leverage, 4% FCF yield, and 90% FCF payout is high-risk regardless of how attractive the headline yield looks.

Debt/EBITDA Through the Commodity Cycle: What Changes

Commodity-sector companies experience dramatic EBITDA swings through the cycle. When coal prices halved from 2022 to 2024, Thungela's EBITDA fell 60%+ — but the company had maintained such low leverage (Net Debt/EBITDA well below 1.0x at the peak) that it weathered the downturn without a dividend catastrophe. This demonstrates the key point: the right time to check Debt/EBITDA is at the peak of the cycle, not at the trough. A company with 1.0x leverage on inflated EBITDA may have 3.5x leverage on normalised EBITDA. Always stress-test: what does this ratio look like with commodity prices 30% lower?

For shipping stocks, EBITDA can halve within a single fiscal year if rates collapse. A tanker company with $500M EBITDA in 2023 might post $280M in 2024. Investors using peak leverage metrics as a comfort blanket get burned. The standard discipline: model leverage on a mid-cycle EBITDA (average of last 3-5 years, excluding peak outliers) to get a true sense of balance sheet resilience.

Debt/EBITDA Sector Cheat-Sheet: Hard Asset Benchmarks

Note: Benchmarks use mid-cycle EBITDA. Always compare to sector peers and stated management targets, not absolute numbers in isolation.

Marco Bozem

Investor & Analyst | Hard Assets, Dividends, Shipping | MB Capital Strategies

Marco analyses commodity and dividend stocks with a focus on shipping, mining and energy. All analyses are based on publicly available annual reports and his own assessment. Not investment advice.

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