CFA Level I · CFA Level I Exam · Credit Analysis for Corporate Issuers
Company X reports EBITDA of 600 million, interest expense of 100 million and total debt of 1,800 million. Its debt-to-EBITDA ratio and EBITDA interest coverage are closest to:
Debt-to-EBITDA is 1,800 divided by 600, which gives 3.0x, and EBITDA interest coverage is 600 divided by 100, which gives 6.0x. The other choices either divide debt by interest expense for coverage or invert the leverage ratio, so they use the wrong formulas.
- ADebt/EBITDA 3.0x; coverage 6.0xCorrect
- BDebt/EBITDA 3.0x; coverage 18.0x
- CDebt/EBITDA 0.33x; coverage 6.0x
Explanation
Debt/EBITDA = 1,800/600 = 3.0x. EBITDA interest coverage = 600/100 = 6.0x. The second option divides debt by interest for coverage, and the third inverts the leverage ratio.
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