CFA Level I · CFA Level I Exam · Credit Analysis for Corporate Issuers
An analyst evaluating a corporate issuer's creditworthiness wants a leverage measure that captures the issuer's ability to service debt from operating performance rather than from the balance sheet alone. Which ratio is most appropriate?
Debt-to-EBITDA is most appropriate because it links total debt to operating earnings, indicating how many years of EBITDA would be needed to repay debt. Debt-to-capital uses balance sheet values, and the current ratio measures short-term liquidity instead.
- ADebt-to-EBITDACorrect
- BDebt-to-capital
- CCurrent ratio
Explanation
Debt-to-EBITDA relates debt to a measure of operating cash earnings, showing how many years of earnings are needed to repay debt. Debt-to-capital is a balance sheet leverage measure. The current ratio measures short-term liquidity, not debt-servicing capacity from earnings.
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