EBITDA-based leverage can be measured by which ratio?

EBITDA-based leverage can be measured by which ratio?

• A. EBITDA-based leverage is measured by EBITDA/Interest Expense
• B. Total Debt/EBITDA
• C. Net Income/EBITDA
• D. Current Assets/Current Liabilities

Answer: (B)

Leverage is about how much debt a business carries relative to the earnings power it can generate. Using debt divided by EBITDA is the standard measure because EBITDA acts as a proxy for cash earnings available to service debt, before financing costs, taxes, and non-cash accounting items. Seeing how many times EBITDA the company’s total debt amounts to tells you how heavy the debt burden is relative to operating cash flow, i.e., the debt multiple. A higher debt/EBITDA means more leverage and potentially higher financial risk, while a lower ratio suggests a lighter leverage burden. Other options don’t fit as well. EBITDA divided by interest expense would assess how well earnings cover interest (an interest coverage view), not the overall debt level. Net income divided by EBITDA blends bottom-line profit with operating earnings and is not a clean leverage metric. Current assets divided by current liabilities is a liquidity measure, not a leverage measure.

Leverage is about how much debt a business carries relative to the earnings power it can generate. Using debt divided by EBITDA is the standard measure because EBITDA acts as a proxy for cash earnings available to service debt, before financing costs, taxes, and non-cash accounting items. Seeing how many times EBITDA the company’s total debt amounts to tells you how heavy the debt burden is relative to operating cash flow, i.e., the debt multiple. A higher debt/EBITDA means more leverage and potentially higher financial risk, while a lower ratio suggests a lighter leverage burden.

Other options don’t fit as well. EBITDA divided by interest expense would assess how well earnings cover interest (an interest coverage view), not the overall debt level. Net income divided by EBITDA blends bottom-line profit with operating earnings and is not a clean leverage metric. Current assets divided by current liabilities is a liquidity measure, not a leverage measure.