What is funded debt to EBITDA?

Funded debt to EBITDA, often called the leverage ratio, shows how many years of current EBITDA it would take to repay a company's debt. Funded debt generally includes all interest-bearing obligations such as term loans, drawn revolving balances, subordinated notes and finance leases. Operating liabilities like accounts payable and accrued expenses are excluded.

Lenders use the ratio to size loans at origination and set maximum leverage covenants that are tested quarterly or annually. Acceptable levels vary by industry, business stability and loan structure, so a multiple that is conservative for one borrower may be aggressive for another. Rising leverage over consecutive periods is often an early signal of deterioration and can prompt a risk rating review.

Because the ratio is sensitive to EBITDA, add-backs and the measurement period matter. A covenant measured on trailing twelve month EBITDA reacts differently than one using annualized quarterly results. Some agreements net unrestricted cash against debt, while others do not. Seasonal borrowers may show very different leverage depending on the testing date. Analysts should confirm which debts and adjustments the loan agreement includes before comparing results across borrowers.