Ratio analysis
Leverage and coverage
Debt ratios, net debt to EBITDA and interest cover — the lender's core metrics.
18 minintermediateMembers
Learning objectives
- Calculate net debt, debt-to-equity and net debt to EBITDA
- Calculate interest coverage
- Judge whether a company's leverage trend is a concern
Leverage ratios answer the long-term solvency question: how much debt does the company carry relative to its capacity to service it? Balance-sheet ratios (debt ÷ equity) compare debt with the owners' stake. Lenders focus more on flow ratios: net debt ÷ EBITDA (how many years of operating earnings the debt represents) and interest coverage (how many times operating profit covers interest).
Net debt = Debt − Cash D/E = Debt ÷ Equity Leverage = Net debt ÷ EBITDA Interest cover = EBIT ÷ Interest expense
- Debt
- interest-bearing borrowings (in practice, include lease liabilities consistently)
- Net debt
- a negative figure means net cash
- EBITDA
- the year's EBITDA; use the same (reported or adjusted) basis as peers
Included with a Formula Quest membership
The rest of this lesson is for members. Members get the full lesson, including its 3 graded exercises, and every other Finance Quest lesson.