How do you calculate the debt payback period?

Divide total debt by free cash flow after interest: EBITDA less cash tax, interest, maintenance capex and any build in working capital. A business with US$20m of debt and US$2.0m of free cash flow after interest has a payback of ten years. A more precise version repays the debt year by year, charging interest on the falling balance, which gives a shorter answer: 7.8 years rather than ten in this page's example. Either way, state the cash flow basis, because it changes the result.

What is the difference between debt payback and an investment's payback period?

Debt payback asks how long the business would take to repay what it owes from its spare cash. An investment's payback period asks how long a project's cash returns would take to recover what was spent on it. They can be read on the same asset, such as a new production line, and give different answers: the line may pay for itself in four years while the loan that financed it, competing with tax, interest and other spending, takes nine.

Is debt to EBITDA the number of years to repay debt?

Only loosely. Debt to EBITDA divides debt by earnings before interest, tax, depreciation and amortisation, so it treats every dollar of EBITDA as available for repayment. In practice tax, interest and the capital spending needed to keep the business running come out first. That is why the payback period on free cash flow is usually much longer than the leverage multiple: a business at 3.6 times can need ten years to clear its debt.

Should the payback period use net debt or gross debt?

Either can be used, and the choice should be stated. Net debt subtracts cash, on the view that it could repay borrowing today, and suits a business whose cash is genuinely spare. Gross debt suits one whose cash is needed for working capital or held against customer prepayments. A lender often calculates both and relies on gross where the cash at the balance sheet date looks seasonal or temporary.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Debt Payback Period: a Worked Example

Count the debt in years of spare cash, and set it against the term.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-07 · 6 MIN READ

// THE SHORT ANSWER

The debt payback period answers a question a lender asks of any term loan: if the business paid nothing to its owners and put every spare dollar into repayment, how many years would the debt take to clear? Divide the debt by the free cash flow left after tax, interest, working capital and the capital spending the business cannot skip. Because the answer is in years, it can be laid directly against the loan's term and the life of what the loan financed. It is struck after costs that debt to EBITDA leaves out, so it is usually the longer number, and the plainer one.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

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PART OF Credit Analysis for Beginners

// 01 — WHY A LENDER COUNTS DEBT IN YEARS

Leverage expressed as a multiple of EBITDA is good for comparing one business with another. It is poor at answering whether this loan will be repaid in this term, because EBITDA is struck before the tax, interest and capital spending that come out of the cash first. The payback period does the conversion. A seven-year loan against a ten-year payback will not repay itself from trading: something else has to happen, a refinancing of the remainder, growth the plan relies on, or a sale. The figure makes that dependence visible on the first page of a credit paper.

// 02 — HOW IT IS CALCULATED, AND ON WHICH CASH

Free cash flow after interest = EBITDA − cash tax − interest − maintenance capex ± working capital

Payback, simple = debt ÷ free cash flow after interest

On cash before interest = debt ÷ lender's free cash flow (shorter; ignores the interest)

Payback, year by year = years until debt × (1 + rate) − cash before interest reaches zero

The basis needs stating, because two of this site's definitions use different ones. The lender's free cash flow is struck before interest, since it is the pool from which all debt service, interest included, is paid. The payback period takes free cash flow after interest, since a debt being repaid still costs interest while it is outstanding. Dividing by the pre-interest figure leaves that cost out and flatters the answer. The simple after-interest figure errs the other way, and not slightly: it charges interest on the full debt every year, though as debt is repaid interest falls and more cash goes to principal. A year-by-year schedule sits between the two. Other choices matter too: gross or net debt, whether growth capex is treated as optional, and whether owners' drawings or dividends are allowed for, since the textbook figure assumes none.

// 03 — THE EXAMPLE

An egg producer, constructed for this page like every figure in it, owes US$20m on a seven-year term loan at 7% that financed new laying barns. EBITDA is US$5.5m, cash tax US$0.6m, maintenance capex US$1.3m, and working capital absorbs US$0.2m a year. The owners have been drawing US$0.5m a year. The figures and the rate are the example's. This page's payback uses cash after interest, as the definition does. In US$m:

Cash before interest: 5.5 − 0.6 − 1.3 − 0.2 = 3.4

Interest: 20 × 7% = 1.4

Free cash flow after interest: 3.4 − 1.4 = 2.0

Debt to EBITDA: 20 ÷ 5.5 = 3.6×

Payback on cash before interest: 20 ÷ 3.4 = 5.9 years

Payback, simple: 20 ÷ 2.0 = 10.0 years

Payback, year by year: 7.8 years

Payback after drawings, simple: 20 ÷ 1.5 = 13.3 years

The year-by-year line puts the whole US$3.4m to the loan each year, with interest charged on the falling balance: US$18.0m owed after year 1, US$8.5m after year 5, US$2.7m after year 7, cleared early in year 8. It leaves tax unchanged as interest falls, which slightly flatters it. Against a seven-year term, even a business that paid its owners nothing would owe about US$2.7m at maturity. With US$0.5m a year drawn, the schedule leaves about US$7.0m at year 7 and runs into year 10.

The figure of 3.6 times reads like three and a half years. Repaid from cash after interest, the debt takes more than twice that.

// 04 — HOW IT DIFFERS FROM DEBT TO EBITDA

Debt to EBITDA is sometimes described as the years a business would take to repay its debt, which would be true only for a business that paid no tax, no interest and spent nothing on its assets. The payback period is that description made accurate. FFO to debt, used in credit ratings, sits close to its inverse, though struck before working capital and capital spending. And the payback period of an investment, used in capital budgeting, is a different question: how long a project's cash returns take to recover its cost. A lender reads both on a new barn, but only one of them tells it when its loan is repaid.

DEFINED IN ONE PARAGRAPH → · DEBT TO EBITDA → · FFO TO DEBT →

// 05 — WHERE IT DECIDES A FILE

The payback period is read against two other spans: the term of the loan and the life of what it financed. Here the barns will outlast the debt by many years, so a refinancing of the last US$2.7m is a reasonable expectation rather than a hope. A payback longer than the asset's life is a different file: the cash flow would have to repay the loan after the asset financed has stopped earning.

Where payback exceeds the term, the lender has three levers and the credit paper should say which it pulled: a longer term or a balloon, accepting the refinancing risk and naming it; a limit on drawings or distributions, which turns 13.3 years back towards 10.0; or a smaller loan. Run on the downside case as well, the figure shows how quickly a weak year pushes the repayment beyond the term.

MAINTENANCE CAPEX → · CASH FLOW ANALYSIS →

// QUESTIONS PEOPLE ASK

How do you calculate the debt payback period?: Divide total debt by free cash flow after interest: EBITDA less cash tax, interest, maintenance capex and any build in working capital. A business with US$20m of debt and US$2.0m of free cash flow after interest has a payback of ten years. A more precise version repays the debt year by year, charging interest on the falling balance, which gives a shorter answer: 7.8 years rather than ten in this page's example. Either way, state the cash flow basis, because it changes the result.
What is the difference between debt payback and an investment's payback period?: Debt payback asks how long the business would take to repay what it owes from its spare cash. An investment's payback period asks how long a project's cash returns would take to recover what was spent on it. They can be read on the same asset, such as a new production line, and give different answers: the line may pay for itself in four years while the loan that financed it, competing with tax, interest and other spending, takes nine.
Is debt to EBITDA the number of years to repay debt?: Only loosely. Debt to EBITDA divides debt by earnings before interest, tax, depreciation and amortisation, so it treats every dollar of EBITDA as available for repayment. In practice tax, interest and the capital spending needed to keep the business running come out first. That is why the payback period on free cash flow is usually much longer than the leverage multiple: a business at 3.6 times can need ten years to clear its debt.
Should the payback period use net debt or gross debt?: Either can be used, and the choice should be stated. Net debt subtracts cash, on the view that it could repay borrowing today, and suits a business whose cash is genuinely spare. Gross debt suits one whose cash is needed for working capital or held against customer prepayments. A lender often calculates both and relies on gross where the cash at the balance sheet date looks seasonal or temporary.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Credit analystReads a borrower and writes the recommendation a decision-maker will act on.
Credit sanctionerHolds delegated authority and signs — or declines — the lending the front line brings.
Portfolio managerOwns the credit on a book after the money is out — reviews, covenants, ratings and early warning.

THE IN-TRAY · ONE MINUTE

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THE CALL · THE LOAN · CAPACITY

A US$35m loan was sized on EBITDA of US$10m. Halfway through the year, management cuts its forecast to US$7m.

What changes?

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THE READING ROOMIN ONE PARAGRAPHDebt payback period What is the debt payback period, and how is it calculated?