What are some key debt metrics, and why are they important?

The leverage multiple, debt / EBITDA, is a common metric comparing debt and EBITDA. EBITDA is a proxy for cashflow that can be used to pay back the debt. It also remains neutral in terms of capital structure, tax jurisdiction, and accounting policies.

The interest coverage ratio is another key debt metric, and is calculated as EBITDA / Interest Expense. Since EBITDA is a good proxy for cashflow, this shows how many times we can pay interest. For example, if EBITDA is two times interest expense, that means we have a bit of cushion even if the interest rate rises, or the EBITDA declines. Lenders are focused on this metric to see how much “cushion” the borrower has.

A more precise version of the interest coverage ratio is: (EBITDA – Capex) / (Interest Expense + Mandatory Repayments of Debt).