Leverage Metrics

Read the Free Lesson → free · no signup wall

Chapters in this video

  1. 0:00 Interest coverage ratio and the EBIT trap
  2. 2:13 Debt/EBITDA in turns and net debt/EBITDA
  3. 4:36 Bucketing credit quality with the three metrics
  4. 5:29 LBO modeling and initial leverage at close
  5. 7:15 Rapid-fire exam recap

What this video covers

  • Why the interest coverage ratio uses earnings before interest and taxes (EBIT), not net income, and how using net income would understate coverage
  • How to calculate debt to earnings before interest, taxes, depreciation, and amortization (debt/EBITDA) and read the result in "turns" of debt
  • How to calculate net debt/EBITDA by subtracting cash from total debt first, and why the exam loves this trap
  • What high coverage plus low debt/EBITDA signals about credit quality, and how the opposite pattern means leveraged or distressed credit
  • Why initial leverage at close, expressed in debt/EBITDA turns, is the single most tested input in LBO modeling
  • How sponsor returns in a leveraged buyout (LBO) come from paying down debt with cash flow and growing EBITDA over the holding period

Read the full lesson, free

This video's complete written lesson is free to read in the CertFuel app, no signup wall. The complete Series 79 course also includes adaptive practice questions and spaced-repetition flashcards.

Read the Free Lesson → free · no signup wall