If a company has high debt but has the capacity to repay it through its earnings, then the debt likely won’t be much trouble for the company. One of the ways to look at a company’s debt-repayment capacity is the net-debt-to-forward-EBITDA ratio, which indicates the number of years it would take for a company to repay its debt.
A lower ratio is better, as it indicates a higher debt-repayment capacity. It’s also usually preferred to use forward EBITDA because investors concentrate more on future earnings potential rather than trailing earnings.
Gold miners’ repayment capacity
The chart above shows the net debt-to-forward-EBITDA ratios of the miners (NUGT) (GDX) we’re covering in this series. Like the current ratio, Newmont Mining (NEM) is doing the best on this ratio as well with the lowest ratio of 0.33x, which indicates a high debt-repayment capability for the miner from its forward earnings. Due to NEM’s repayment of debt and higher earnings, this ratio has improved from 1.3x at the end of 2015 to 0.33x currently.
Kinross Gold also seems comfortably placed in this metric. Similar to the current ratio, Goldcorp (GG) is faring the worst among senior gold miners in this metric with a ratio of 1.7x.
Investors should, however, note that the net debt-to-forward EBITDA ratio for a company could change quickly following changes in a company’s earnings estimates. The ratio reflects changes in earnings capacity.