Cash available for debt service

A lender is not repaid out of EBITDA. It is repaid out of cash, so it builds down from EBITDA to what the business can genuinely hand over: less the capital expenditure needed to keep the business running and to fund the plan, less the working capital that growth absorbs, less cash tax, and then it asks how many times what remains covers the interest bill and how much is left to amortise principal.

That build is why two businesses with identical EBITDA can support very different amounts of debt. Capital intensity, the working capital cycle and the cash tax rate all sit between the earnings figure and the money, and none of them is visible in a margin. A candidate who sizes debt as a multiple of EBITDA alone has skipped the step where the answer is actually decided.

Several adjustments are routinely missed. Lease payments fall below EBITDA under IFRS 16, so a business with a large leasehold estate reports earnings that overstate the cash it controls. Monitoring fees paid to the sponsor are a real cash cost. Exceptional items that recur are not exceptional. Each of them reduces the cash and therefore the debt the business can carry.

The figure is also what a downside case is run on. A lender is less interested in what the business produced last year than in how little it could produce in a bad one, which is why revenue under long contracts supports more debt than the same revenue won project by project.