Debt/EBITDA measures financial leverage by dividing a company’s total debt by its EBITDA — a proxy for cash earnings available to service obligations before capital expenditures.

How it works

Total debt typically includes funded term loans, revolver draws, and sometimes capital leases. EBITDA adds back interest, taxes, depreciation, and amortization to operating income — though lenders often use adjusted EBITDA with add-backs for one-time costs (subject to negotiation).

A company with $50M net debt and $25M EBITDA runs at 2.0x leverage. Buyout deals in stable software might land at 5–7x at close; industrial businesses often lower. Venture-stage companies with negative EBITDA are evaluated on revenue multiples or minimum liquidity instead.

Credit agreements set maximum Debt/EBITDA covenants tested quarterly. Breaches trigger cures, waivers, or default. Growth debt providers may use net debt/EBITDA once companies turn profitable.

Founders should know whether EBITDA adjustments in their term sheet are realistic — aggressive add-backs inflate headroom until diligence trims them.

Why it matters

• Founders: Before signing venture debt or accepting a PE bid, model leverage through a downturn. A ratio that looks fine at peak EBITDA breaks if growth slows.
• Investors: LBO underwriting lives on entry and exit multiples of Debt/EBITDA. Small EBITDA misses magnify leverage and equity returns.

Common mistake

Using management-adjusted EBITDA with unapproved add-backs when comparing to market covenant standards. Lenders recalculate under their own definitions.

Related ideas

See also debt pushdown, covenant, interest coverage ratio, and net leverage.