The Question
Debt/EBITDA answers 'how much debt does this business already carry, relative to its earnings' — a leverage question. Interest coverage answers 'can current earnings comfortably service the interest on that debt' — a serviceability question. A business can look fine on one and stressed on the other, and which ratio a lender weighs more heavily depends entirely on the situation.
Neither ratio alone tells the full story, but they fail in different, predictable ways — which is worth understanding before assuming a strong number on one automatically means a strong number on the other.
How the Two Ratios Actually Differ
- Debt/EBITDA measures the size of the debt burden relative to operating earnings — it says nothing directly about whether that debt is affordable at current interest rates.
- Interest coverage measures affordability directly — how many times over current EBITDA covers the interest bill — but says nothing about the total quantum of debt outstanding.
- A business with a favourable interest rate can carry higher leverage (Debt/EBITDA) while still showing comfortable interest coverage, and vice versa in a rising-rate environment.
- Lenders generally weigh interest coverage more heavily for serviceability and Debt/EBITDA more heavily for overall balance sheet risk and recovery prospects.
When Each Ratio Actually Drives the Decision
- Debt/EBITDA typically drives decisions around overall leverage limits, covenant headroom and how much fresh debt a business can add.
- Interest coverage typically drives decisions around near-term serviceability and whether cash flows can absorb an existing or proposed interest burden.
- In a rising interest-rate environment, interest coverage can deteriorate even if Debt/EBITDA stays flat — the two ratios can move in opposite directions.
- Both are read alongside cash-flow quality, not in isolation — a high-EBITDA business with poor cash conversion can look fine on both ratios and still struggle to service debt in practice.
Questions Worth Asking
Is the current concern about total leverage, or about near-term serviceability specifically?
How exposed is interest coverage to a rate increase on the existing facility mix?
Does EBITDA convert reliably to cash, or is there a gap that neither ratio captures on its own?
Which ratio is the lender actually anchoring the covenant structure to, and why?
We rarely look at either ratio in isolation when assessing debt capacity for a corporate debt raise — the two together, read alongside genuine cash conversion, give a far more honest picture than either one alone. A business fixating on improving just one ratio without understanding what the other is telling the lender often ends up solving the wrong problem.
Key Takeaways
- Debt/EBITDA measures leverage; interest coverage measures serviceability — they answer different questions.
- The two ratios can move in opposite directions, especially as interest rates change.
- Lenders typically weigh interest coverage for near-term serviceability and Debt/EBITDA for overall balance sheet risk.
- Both need to be read alongside actual cash conversion, not treated as sufficient on their own.
Closing Perspective
The businesses that manage lender relationships well don't just track these ratios — they understand which one is actually driving a specific conversation, and address that one directly rather than assuming an improvement anywhere helps everywhere.