M&A
Leverage Ratio
Definition
A measure of indebtedness, most often net interest-bearing debt divided by EBITDA, expressed as a multiple. It indicates how many years of current earnings the debt represents.
Why it matters
Leverage is the number lenders and covenants are written around, so it governs a great deal more than the balance sheet. It moves on both inputs, which is what makes it treacherous: a company can reduce absolute debt and still see leverage rise if earnings fall faster.
That matters most when guidance is cut. A downgrade to EBITDA guidance mechanically worsens the multiple, and it does so precisely when a business may be approaching a refinancing and needs the figure to look its best. Acquisitive companies face the same effect in reverse, since debt is drawn immediately while the acquired earnings arrive over time.
What counts as high depends on the sector and the stability of cash flow. Gambling operators with predictable revenue have historically sustained higher multiples than the wider market, though that tolerance narrows sharply when regulatory or tax change threatens the earnings side.
The bottom line
Leverage is a fraction with two moving parts, and the denominator is the one that surprises people. Falling earnings raise leverage even when debt is being repaid.