What is Net Debt/FCF?
Net Debt-to-FCF shows how many years it would take to pay off all net debt using free cash flow. It's a key measure of financial health and leverage.
Think of it like this
You owe $50,000 on your car (debt) but have $10,000 in savings (cash). Net debt is $40,000. If you save $10,000 per year, your Net Debt/FCF ratio is 4 - it takes 4 years to pay off the car.
Formula
Net Debt/FCF = (Total Debt - Cash) / Annual Free Cash Flow- Net Debt: Total Debt minus Cash & Equivalents
- Free Cash Flow: Annual FCF generated
Why it matters
- Shows years needed to pay off debt
- Lower ratio = safer, more financial flexibility
- Important for assessing bankruptcy risk
- Credit agencies use this metric
What's a good value?
< 1
Excellent
Could pay off debt in under a year
1-3
Good
Comfortable debt levels
3-5
Moderate
Watch carefully, manageable but elevated
> 5
Risky
High debt burden, financial stress
Real-world example
Apple: Often negative (more cash than debt) - fortress balance sheet. AT&T: 3-4 ratio - telecom with high debt load. Airlines post-COVID: 8+ - struggling with debt. Tech startups: ratio doesn't apply if burning cash.
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