In evaluating LBO debt, which statement correctly describes Net debt / EBITDA and DSCR?

• A. Net debt / EBITDA is a measure of profitability.
• B. Net debt / EBITDA is a leverage metric, while DSCR is a cash flow coverage metric.
• C. DSCR is a leverage metric.
• D. They are not used in LBO analysis.

Answer: (B)

When evaluating LBO debt, you distinguish leverage from cash-flow coverage. Net debt divided by EBITDA is a leverage multiple: it shows how much debt the business has relative to the cash-generating power of the company, using net debt (total debt minus cash) and EBITDA as a proxy for operating cash flow. This tells you how aggressively levered the capital structure is and helps assess financial risk. Debt service coverage ratio (DSCR), on the other hand, is a cash-flow coverage metric: it compares the cash available to service debt (often EBITDA or similar cash flow measure) to the actual debt service due (interest and principal). A higher DSCR means the company can comfortably meet its debt obligations, while a DSCR below 1 indicates insufficient cash flow to cover debt payments. Therefore, the correct statement is that net debt / EBITDA is a leverage metric, while DSCR is a cash flow coverage metric.