When debt speaks: the indicator that reveals a business crisis
Theory and practice
In previous posts we learned how to read financial statements, but one fundamental issue remains to be addressed: knowing how to recognise the warning signs of a crisis.
Sensing when a business is getting into difficulty is not just about avoiding the worst: it means developing awareness, understanding that the situation calls for radical change and having the courage to act.
To do this you need a genuine controlling system, capable of constantly monitoring economic and financial parameters (KPIs) and telling mere slowdowns apart from real symptoms of crisis, analysing their internal and external causes.
The first warning signs show up in two different ways. Economic, with a fall in turnover or a squeeze on margins. Financial, with longer payment times, receivables collected late or stock building up for no reason.
Of all the indicators, there is one that has taken on crucial importance in recent years: the ratio of Net Financial Position to EBITDA (NFP/EBITDA). It is the figure that tells you how long it would take, in theory, to repay all financial debt using only the cash generated by operating activities.
The Net Financial Position (NFP) is the difference between debts and financial assets: it represents the net debt of the business. EBITDA, or gross operating margin, on the other hand measures the company’s ability to generate operating wealth before depreciation, amortisation and write-downs. It is the first building block of the business’s potential cash flow.
When you put these two numbers together, you get a key indicator: NFP / EBITDA ≤ 6 This value represents the equilibrium threshold. If the company could use all of its EBITDA to repay its net debt, it would take no more than 6 years to clear it.
Why “6” in particular? It’s not a random number: it was introduced by the European Central Bank during the Asset Quality Review (AQR), used to assess the soundness of banks and the quality of their loans. The ECB introduced this threshold after observing that many companies that later became “non-performing loans” exceeded that value.
Be careful, though: this does not mean that the NFP/EBITDA ratio is an absolute judge. A value above 6 does not condemn the business, but it is a clear warning sign that calls for deeper analysis. You need to understand why debt is growing, how cash is generated and which operating choices are undermining financial balance. Monitoring these indicators continuously makes it possible to spot financial strain early and to act before it turns into a structural problem for the business.
Crossing that threshold is not a death sentence but a message: “stop, look at the numbers and take action”. Those who do so in time are often saved. Those who ignore it usually act too late.