Leverage Ratio
Definition
The leverage ratio measures indebtedness relative to cash flow, most commonly Total Debt / EBITDA (gross leverage) or Net Debt / EBITDA (net leverage, subtracting cash). It is the primary shorthand for how levered a credit is: "a 5.5x levered business" means total debt is 5.5 times EBITDA.
Variants matter: senior secured leverage counts only secured debt through that lien; first-lien leverage stops at first-lien debt; covenant definitions typically use "Adjusted EBITDA" with negotiated add-backs (synergies, one-time costs), which can meaningfully flatter the ratio versus reported EBITDA.
As rough market context, large-cap LBOs in recent US markets have commonly been financed around 4–6x total debt/EBITDA (higher for strong credits, lower in tight markets); investment-grade companies typically run far lower. Rating agencies, lenders, and covenants all key off this metric.
Why interviewers ask
Interviewers ask how much debt a company can support, how you would assess a credit, or what leverage a given LBO used — all answered in turns of leverage. Knowing gross versus net and the role of EBITDA add-backs shows real credit fluency.
Related terms
Interviews don't test definitions — they test recall under pressure.
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