The ratio EBITDA / Cash Interest is primarily used as which type of metric in LBO analysis?

The ratio EBITDA / Cash Interest is primarily used as which type of metric in LBO analysis?

• A. Interest coverage
• B. Leverage ratio
• C. Liquidity ratio
• D. Growth metric

Answer: (A)

This measures a company’s ability to cover its debt service payments from operating cash flow. By taking EBITDA and dividing it by cash interest expense, you get how many times the company can pay its interest with the cash it generates from operations. In an LBO, debt servicing is critical, so lenders and sponsors look at this as a coverage metric—the more times EBITDA can cover the cash interest, the safer the debt remains and the more financing headroom there is. It’s not about how much debt you have (that’s a leverage view), not about short-term liquidity, and not a growth metric. For example, if EBITDA is $100 and cash interest is $25, the ratio is 4x, meaning four times the interest could be covered from operating earnings.

This measures a company’s ability to cover its debt service payments from operating cash flow. By taking EBITDA and dividing it by cash interest expense, you get how many times the company can pay its interest with the cash it generates from operations. In an LBO, debt servicing is critical, so lenders and sponsors look at this as a coverage metric—the more times EBITDA can cover the cash interest, the safer the debt remains and the more financing headroom there is. It’s not about how much debt you have (that’s a leverage view), not about short-term liquidity, and not a growth metric. For example, if EBITDA is $100 and cash interest is $25, the ratio is 4x, meaning four times the interest could be covered from operating earnings.