Debt/EBITDA, Interest Coverage, FCCR, DSCR, Net Leverage — the six ratios every credit interview tests, with formulas, thresholds, and worked numbers.
All six metrics are calculated using the same company throughout this guide so you can see how they relate to one another. Memorize these numbers — they serve as a useful anchor for understanding what each ratio actually measures.
| Line Item | Amount | Notes |
|---|---|---|
| LTM Revenue | $625.0M | Mid-market business services |
| LTM EBITDA | $125.0M | 20.0% margin |
| D&A | $18.0M | — |
| Capex | $15.0M | Maintenance + growth |
| Annual Interest Expense | $28.0M | Blended rate on $500M total debt |
| Total Debt | $500.0M | 4.0x EBITDA |
| Cash on Balance Sheet | $25.0M | Minimum operating cash |
| Net Debt | $475.0M | Total Debt - Cash |
| Mandatory Amortization | $25.0M | 5% of $500M (TLA structure) |
| Total Annual Debt Service | $53.0M | Interest $28M + Amort $25M |
Total leverage is the first number every credit professional calculates. It tells you how many years of EBITDA generation would be required to pay off all debt if the company applied 100% of EBITDA to debt repayment — which of course no company actually does, but the ratio gives a clean relative measure of indebtedness.
| Lender Type / Sector | Typical Range | Max Stretch | Notes |
|---|---|---|---|
| Direct Lending (core market) | 4.0x – 6.0x | 6.5x | Quality businesses only above 5.5x |
| Broadly Syndicated Loans | 3.5x – 7.0x | 7.5x | Market sets the clearing price |
| Investment Grade | 1.5x – 3.0x | 3.5x | Rating agency constrained |
| Distressed / Special Situations | >7.0x | No hard cap | Price-driven, recovery analysis dominates |
| SaaS / Software | 5.0x – 7.0x | 7.5x (ARR-based) | Sometimes sized on ARR multiples |
| Industrial / Manufacturing | 3.5x – 5.0x | 5.5x | Asset collateral provides partial offset |
Our example company at 4.0x is comfortably within the direct lending range for business services. A 4.0x leveraged business services company is a solid credit — there is substantial room for EBITDA to compress before covenant triggers and a reasonable recovery at almost any distressed multiple.
Net leverage adjusts gross debt for cash on the balance sheet. The logic is simple: cash can be used to pay down debt immediately, so a company with $500M debt and $100M cash is meaningfully different from one with $500M debt and $10M cash.
The 0.2x difference between gross (4.0x) and net (3.8x) leverage reflects $25M of cash — meaningful but not transformative. When evaluating net leverage, a lender should ask whether the cash is truly accessible or whether a portion is trapped in subsidiaries, restricted by covenants, or required to run daily operations. Minimum operating cash — typically 2–4 weeks of operating expenses — should generally not be counted against debt.
Interest coverage tells you how many times over the company can pay its interest bill from EBITDA. It is the most direct measure of near-term debt serviceability and is one of the most commonly tested maintenance covenants in direct lending.
| Coverage Level | Interpretation | Lender Action |
|---|---|---|
| > 3.0x | Comfortable — strong buffer | Standard monitoring |
| 2.0x – 3.0x | Acceptable — limited cushion | Enhanced reporting requirements |
| 1.5x – 2.0x | Watch — stress scenario risk | Covenant waiver discussions begin |
| < 1.5x | Stressed — approaching default | Workout team involvement |
| < 1.0x | EBITDA cannot cover interest | Cash burn / restructuring |
Our example company at 4.5x coverage has substantial headroom. Interest would need to more than triple, or EBITDA would need to fall by more than 78%, before the company stopped generating enough EBITDA to cover interest. That is a very wide buffer — a sign of a conservatively structured deal.
FCCR is the more conservative sibling of interest coverage. Where interest coverage ignores capex and mandatory amortization, FCCR captures all the fixed charges a company must pay — it is the real picture of cash flow adequacy for debt service.
FCCR drops from 4.5x (interest coverage) to 2.1x once capex and amortization are included. This compression illustrates why sophisticated lenders prefer FCCR over simple interest coverage — a company can show strong coverage on interest alone while struggling to actually service the full debt obligation.
DSCR is similar to FCCR but uses free cash flow (after tax, after working capital changes) rather than EBITDA minus capex in the numerator. It is most commonly used in project finance and infrastructure lending, where cash flow rather than accounting EBITDA drives repayment capacity.
At 1.09x DSCR, the company is barely covering its total debt service on a free cash flow basis. This is not unusual for a leveraged buyout in year one — the FCF-based ratio will be tight immediately post-close before debt pay-down begins. What matters is the trajectory: as amortization reduces the debt balance, both interest expense and mandatory amortization decline, and DSCR improves.
| Lending Context | Typical Minimum DSCR | Notes |
|---|---|---|
| Project Finance | 1.30x – 1.50x | Hard constraint; cash sweeps are triggered |
| Commercial Real Estate | 1.20x – 1.35x | Key metric for cap rate / NOI analysis |
| Direct Lending (corp) | 1.05x – 1.15x | More flexibility; FCCR is primary covenant |
| SBA / Bank Lending | 1.25x | Hard regulatory requirement |
LTV measures debt as a percentage of asset value or enterprise value. It is the primary metric in real estate and asset-based lending, and it matters in corporate credit as a sanity check on recovery: even if cash flow metrics look acceptable, if debt exceeds likely enterprise value at a distressed multiple, the lender is structurally underwater.
An 80% LTV at a distressed multiple means the lender recovers 80 cents on the dollar if the company is sold at a 5x multiple in distress — acceptable for a senior secured lender, though not comfortable. If LTV in distress exceeded 100%, the lender would take a principal loss even in a sale, which most direct lenders consider unacceptable at origination.
| Metric | Formula | This Company | Comfortable Threshold | Assessment |
|---|---|---|---|---|
| Total Leverage | Debt / EBITDA | 4.0x | < 5.5x (direct lending) | Strong |
| Net Leverage | Net Debt / EBITDA | 3.8x | < 5.0x | Strong |
| Interest Coverage | EBITDA / Interest | 4.5x | > 3.0x | Strong |
| FCCR | (EBITDA - Capex) / (Int + Amort) | 2.1x | > 1.5x | Adequate |
| DSCR | FCF / Total Debt Service | 1.09x | > 1.10x | Tight |
| Distressed LTV | Debt / Distressed EV | 80.0% | < 85% | Acceptable |
Leverage ratios measure a stock of debt against a flow of earnings — they are useful but backward-looking. Coverage ratios measure whether the company can actually pay its bills today, this quarter, this year. A company at 6.0x leverage with 3.5x interest coverage is a better credit than a company at 4.5x leverage with 1.6x interest coverage. The first has high debt relative to earnings but strong cash generation; the second is already straining to service what looks like moderate debt. In a portfolio review or credit committee meeting, coverage gets the most airtime because it is where defaults actually originate.
Both measure debt service capacity, but they use different numerators. FCCR uses EBITDA minus capex — an approximation of unlevered free cash flow before taxes and working capital. DSCR uses actual free cash flow after taxes, interest, and working capital changes — the real cash available to service debt. FCCR is more common in corporate leveraged lending because it strips out tax timing differences and working capital swings that can distort period-to-period comparisons. DSCR dominates in project finance and real estate because those assets generate deterministic cash flows where the true FCF is more predictable and meaningful.
Almost certainly the first company, despite the higher leverage. 4.0x interest coverage means EBITDA must fall 75% before the company cannot pay its interest bill. 2.0x coverage means EBITDA only needs to fall 50% to hit a coverage crisis. The higher-leverage company likely has a lower interest rate — perhaps because it is a higher-quality business in a low-cyclicality sector — which is why the coverage is strong despite the higher debt load. Credit analysis is always about cash flow adequacy under stress, not just leverage multiples in isolation.
Maintenance covenants are typically set with 25–35% headroom from the entry metric. If FCCR at close is 2.1x, the covenant might be set at 1.5x — giving the borrower room to underperform before triggering a default. The covenant is not meant to trip at the first sign of weakness; it is meant to give the lender an early warning system and a seat at the table for remediation conversations before the business deteriorates to the point where restructuring is the only option. Setting covenants too tight creates false positives; setting them too loose defeats the purpose.