Leverage
LBOThe amount of debt in a capital structure, usually quoted as a multiple of EBITDA.
Also written: gearing
Leverage is normally expressed as net debt divided by EBITDA, so a company with 450 of net debt and 100 of EBITDA runs at 4.5x. It is the single number lenders, sponsors and rating agencies all anchor on.
It amplifies outcomes in both directions. Because debt has a fixed claim, whatever is left for equity swings more than the operating profit does: modest EBITDA growth produces large equity returns, and a modest decline can wipe the equity out.
It also worsens on its own. Leverage rises when EBITDA falls even if the company never borrows another euro, which is why covenants bite in downturns rather than during expansion.
What counts as high depends entirely on the business. Six times is unremarkable for a contracted infrastructure asset with predictable cash flow and dangerous for a cyclical manufacturer, which is why candidate quality matters more than the headline multiple.
Worked example
Net debt 550 against EBITDA of 100 is 5.5x at entry. Five years later debt is 300 and EBITDA is 130, so leverage is 2.3x.
That fall is deleveraging, and it is where most of a buyout's equity return comes from even when the exit multiple matches the entry multiple exactly.