Net Leverage Ratio is a key financial metric that helps investors and analysts assess a companyís financial health by measuring its level of debt relative to earnings. It provides insights into how much of a companyís operations are funded through borrowed capital and whether the firm can comfortably meet its debt obligations.

In simple terms, the Net Leverage Ratio is calculated as a companyís Net Debt (Total Debt minus Cash and Cash Equivalents) divided by its EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). The formula is:

Net Leverage Ratio = (Total Debt ñ Cash & Cash Equivalents) / EBITDA

This ratio is widely used by investors, credit rating agencies, and lenders to evaluate a firmís ability to repay debt from its operational earnings. A higher ratio indicates greater financial leverage, suggesting higher debt levels compared to earnings and potentially higher financial risk. Conversely, a lower ratio reflects stronger financial stability and lower dependence on external borrowing.

For example, if a companyís total debt is ?500 crore, cash reserves are ?100 crore, and EBITDA is ?200 crore, its Net Leverage Ratio would be (500 ñ 100) / 200 = 2x. This means the companyís net debt is twice its annual earnings before interest and taxes, signaling moderate leverage.

While acceptable leverage levels vary by industry, most investors prefer companies with manageable ratiosótypically below 3x for stable sectors. However, capital-intensive industries may operate comfortably at higher levels. Monitoring this ratio over time helps identify trends in a companyís debt management, profitability, and financial discipline, making it an essential tool for informed investment decisions.