Module IV· Debt RatiosAdvanced
Question
Why is '(EBITDA − Capex) / Interest' a stricter coverage test than just 'EBITDA / Interest'?
Answer
Mechanics
Capex pulls cash out of EBITDA — a coverage ratio after capex shows the "real" cash available for interest.
Deep diveShow more details
Comparison
| Ratio | Formula | Meaning |
|---|---|---|
| EBITDA / Interest | EBITDA / Cash Interest | Cash flow before investment |
| (EBITDA − Capex) / Interest | (EBITDA − Capex) / Cash Interest | Cash flow after capex |
Example
| Item | Value |
|---|---|
| EBITDA | $50m |
| Capex | $10m (20% of sales) |
| Cash Interest | $16m |
| EBITDA / Interest | 50 / 16 = 3.1x |
| (EBITDA − Capex) / Interest | 40 / 16 = 2.5x |
Consequence
- EBITDA / Interest at 3.1x looks comfortable
- After capex only 2.5x — tight when capex-intensive
- In machinery (15-20% capex/sales) often a critical test
Sector sensitivity
| Sector | Capex / sales | Effect on coverage |
|---|---|---|
| Software / SaaS | 3-8% | minimal |
| Healthcare services | 8-12% | moderate |
| Middle-market industrials | 15-25% | high — coverage noticeably lower |
| Heavy industry | 25-35% | very high — critical |
Common pitfalls
- With a capex holiday (temporary reduction) coverage looks artificially better
- Maintenance capex vs total capex — the lender sometimes tests maintenance only
Pitch tip
Question: "Which coverage test is relevant?"
Answer: "(EBITDA − Capex) / Interest, because it shows the real cash-flow capacity for interest service. In capex-intensive sectors at least 1.5x as a floor, otherwise distress risk"