Leverage ratio (net debt / EBITDA)

The leverage ratio divides a company's net financial debt by its EBITDA. It measures how many years of operating earnings would be needed to repay the debt and is the central metric of credit analysis and LBO structuring.

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It differs from financial leverage, which describes the mechanism by which debt amplifies the return on equity. A high leverage ratio increases potential return but also financial risk; lenders set covenants capping this ratio.

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Example: a target shows net debt of CHF 9.0 million against EBITDA of CHF 3.0 million, a leverage ratio of 3.0x. An LBO structure pushing this ratio to 4.5x would increase the return on equity but reduce the safety margin against a downturn.

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At Hectelion, we calibrate the sustainable leverage ratio of each structure against the target's cash generation capacity.