Jaarrekening.be
A company with a lot of debt is not necessarily in danger. A company with little debt is not necessarily safe either. The question is whether profit is enough to pay the interest and repay the loans. Banks answer that question with two ratios, and you can calculate them yourself.
The short answer
- Interest coverage
- 9901 divided by 650
- Debt/EBITDA
- Debt divided by 9901 plus 630
- Interest shown separately
- Only in the full scheme
Two questions, two ratios
Both ratios set debt against the income statement, not the balance sheet. That is the difference with solvency, which looks at how much of the assets is financed with equity.
- Interest coverage answers the short question: can the company pay its interest this year out of what its activity earns?
- Debt/EBITDA answers the long question: how many years would it take to repay all debt if all profit before depreciation were used for it?
Calculating the interest coverage ratio
Interest coverage ratio = operating profit (9901) / debt charges (650)
Operating profit is what the activity earns, before financial income, financial charges and taxes. It is also called EBIT. Debt charges are the interest on loans, overdrafts and leasing, and appear in the full scheme under recurring financial charges.
| Interest coverage | What it means (rule of thumb) |
|---|---|
| Above 3 | Comfortable. Profit can fall sharply before the interest is at risk. |
| 1.5 to 3 | Vulnerable. A bad year or rising interest rates put the company under pressure. |
| 1 to 1.5 | Weak. Almost all operating profit goes to the bank. |
| Below 1 | Operating profit does not cover the interest. The company pays out of reserves or with new debt. |
When the scheme does not show interest
The abbreviated and the micro scheme have no code 650. They only show recurring financial charges (code 65). Besides interest, these include bank charges, payment differences and other financial costs. You can then approximate the ratio with:
approximate interest coverage = operating profit (9901) / recurring financial charges (65)
Because 65 contains more than just interest, the result comes out lower than the real ratio. If this strict calculation already gives you a ratio above 3, the interest is not a problem.
Calculating debt/EBITDA
EBITDA is operating profit (9901) plus depreciation and write-downs on fixed assets (630). Jaarrekening.be also adds write-downs on stocks and trade receivables (631/4). How EBITDA works and what it is not is explained in what is EBITDA.
For the debt, there are two common choices:
| Variant | Debt | Who uses it |
|---|---|---|
| Net financial debt / EBITDA | Financial debts due after more than one year (170/4), repayments falling due this year (42) and short-term financial debts (43), minus current investments (50/53) and cash (54/58) | Banks and acquirers, often in loan covenants |
| Total debt / EBITDA | All debts (17/49), so also suppliers, tax authorities, social security and advance payments from customers | Jaarrekening.be, as a stricter measure that is easy to recalculate |
The second variant always comes out higher, because more debt is counted and cash is not deducted. Never put a figure next to a benchmark calculated with the other variant. On net financial debt, many lenders call below 2 strong and above 4 heavy; that is a rule of thumb, not a legal limit.
Read also What is EBITDA? Explanation and calculation from Belgian annual accountsWorked example with Bouwbedrijf Janssens NV
A fictional construction company with cranes, trucks and its own workshop. It is large enough for a full scheme, so debt charges are shown separately.
| Item | Code | Amount |
|---|---|---|
| Operating profit | 9901 | €1,200,000 |
| Depreciation on fixed assets | 630 | €900,000 |
| Write-downs on stocks and trade receivables | 631/4 | €50,000 |
| Debt charges | 650 | €300,000 |
| Financial debts due after more than one year | 170/4 | €4,200,000 |
| Repayments falling due this year | 42 | €600,000 |
| Short-term financial debts (overdraft) | 43 | €500,000 |
| Cash | 54/58 | €800,000 |
| Total debt | 17/49 | €9,000,000 |
-
Interest coverage
€1,200,000 / €300,000 = 4.0. Operating profit covers the interest four times. Even if profit halves, the interest stays affordable. -
EBITDA
€1,200,000 + €900,000 + €50,000 = €2,150,000. Without the write-downs on stocks and receivables, as many banks calculate it, it is €2,100,000. -
Net financial debt / EBITDA
Financial debts €4,200,000 + €600,000 + €500,000 = €5,300,000, minus €800,000 cash = €4,500,000. Divided by €2,150,000 that gives 2.1. A bank finds that acceptable for a company with heavy machinery. -
Total debt / EBITDA
€9,000,000 / €2,150,000 = 4.2. This is the figure you see on Jaarrekening.be. It is twice as high because suppliers, subcontractors and the tax authorities count too. Above all, follow the trend: if it rises three years in a row, debt is growing faster than profit.
What to watch for
- One year is not a trend. A construction company with a bad year can temporarily drop below 1.5. Three years of decline is more serious than one bad figure.
- EBITDA is not cash. Investments, taxes and growth in stocks and receivables still have to come off. A company with a good debt/EBITDA can still be short of cash. So also read the difference between profit and cash flow.
- Leasing and rent. A company that rents its vehicles or building instead of buying them has less debt on the balance sheet, but the rent sits in the costs. Compare companies that work the same way.
- Holding companies. A holding company often has little operating profit and gets its income from dividends from subsidiaries, which appear under financial income. Interest coverage on operating profit says little there. What a holding company is, you can read in this article.
Both ratios on Jaarrekening.be
Find the company through company search and open Financial ratios. Under Solvability you find total debt, short-term and long-term debt, the "Interest Coverage Ratio" and "Debt / EBITDA", next to EBITDA and EBIT under Profitability.
- The interest coverage ratio only appears if the annual accounts show debt charges (650) separately, so for a full scheme. For an abbreviated or micro scheme, you calculate the approximation with code 65 yourself, under Financial statements.
- Debt / EBITDA is total debt (17/49) divided by EBITDA. When EBITDA is negative, the ratio is not shown.
- Filings without an income statement get neither ratio.
The three most recent years are visible with a free account. The older years and the charts per ratio, under Charts, are part of Pro.
In short
The interest coverage ratio (9901 / 650) tells you whether profit covers the interest; above 3 is comfortable, below 1 is not. Debt/EBITDA tells you how many years of profit before depreciation are needed to repay the debt. Banks calculate with net financial debt, Jaarrekening.be with total debt. Because only the full scheme shows interest separately, you approximate coverage for small companies with recurring financial charges (65), which gives a stricter result.