In LBO analysis, how is leverage commonly measured?

In LBO analysis, how is leverage commonly measured?

• A. Debt / EBITDA
• B. EBITDA / Interest
• C. Debt / Revenue
• D. EV / EBITDA

Answer: (A)

Leverage in an LBO is viewed through how much debt the business carries relative to the cash-flow it can generate, which is most commonly expressed as debt divided by EBITDA. EBITDA serves as a practical proxy for operating cash flow because it excludes financing decisions, taxes, and non-cash charges, giving a cleaner sense of the earnings available to service debt. A lower debt/EBITDA means more cushion to cover interest and principal payments, while a higher ratio signals greater risk if cash flows dip. Why the other ideas aren’t the standard measure here: EBITDA divided by interest would show how many times operating earnings cover interest payments (an interest coverage metric), not how heavily debt is loaded against earnings. Debt divided by revenue ignores profitability and how efficiently the business converts sales into cash, which can be misleading when margins vary. Enterprise value over EBITDA is a valuation multiple, not a measure of leverage.

Leverage in an LBO is viewed through how much debt the business carries relative to the cash-flow it can generate, which is most commonly expressed as debt divided by EBITDA. EBITDA serves as a practical proxy for operating cash flow because it excludes financing decisions, taxes, and non-cash charges, giving a cleaner sense of the earnings available to service debt. A lower debt/EBITDA means more cushion to cover interest and principal payments, while a higher ratio signals greater risk if cash flows dip.

Why the other ideas aren’t the standard measure here: EBITDA divided by interest would show how many times operating earnings cover interest payments (an interest coverage metric), not how heavily debt is loaded against earnings. Debt divided by revenue ignores profitability and how efficiently the business converts sales into cash, which can be misleading when margins vary. Enterprise value over EBITDA is a valuation multiple, not a measure of leverage.