Net debt divided by EBITDA, expressed in turns; roughly how many years of cash earnings it would take to repay the borrowings.
This is the standard leverage measure in credit markets and the most common covenant test. Investment-grade industrials typically run under 3 times; leveraged buyouts often start above 5 and are expected to deleverage through cash generation.
The ratio has both a numerator and denominator problem in a downturn: debt stays put while EBITDA falls, so leverage rises fastest exactly when it is least welcome. That mechanical effect is what turns recessions into restructurings.
Example: Northwind Tools has $335M of net debt and $195M of EBITDA, 1.7 times. A 25% EBITDA fall to $146M would lift it to 2.3 times without a dollar of new borrowing.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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