For instance, Q 14 in the afternoon CFAI Mock exam, they ask you, looking at exhibit 2, what are the changes in leverage and coverage ratios? In my heart, I knew the leverage ratio worsened due to what was in Exhibit 3, but when looking SOLELY at exhibit 1 like they asked you too, it looks like it improved because the debt decreased the next year. It kind of pisses me off how sometimes you’re only supposed to look at one exhbit, whereas in other questions, you’re not.
ALSO, what the heck is Deb/tEBITDA. Never seen it once anywhere! The only leverage ratios I’m aware of, and I memorized every single formula in the beginning of the FRA CFAI book, is Debt/equity, debt/assets, and debt/total capital. I have NEVER seen Debt/EBITDA and I also don’t know out of the various operating figures listed in this wonderful item set we would compare debt to. There’s NI, EBT, EBIT, Gross Profit. Give me some more guidance if you want me to answer these questions.
-Frustrated CFA candidate
Go to the end of the credit analysis chapter. I just learned these the other day for the first time. Some good stuff on leverage (Debt/Ebitda) and net leverage (same except subtract cash from debt). Also, there’s some good BB’s on calculating leverage for different types of debt (ex - calculate senior unsecured leverage). Simple formulas that could very well come up just as they did on the mock
Also frustrated. According to investopedia this seems to be a “coverage ratio” not leverage. AHHHH
http://www.investopedia.com/terms/d/debt_edbitda.asp
im going to thoroughly go through the blue boxes this week to understand how CFAI does things and learn everything that way and forget all the common sense I have
I think in theory, there are no limited amount of what could be called Leverage and Coverage ratios.
As long as you have a measure of debt in the denominator and some measure of income in the numerator, this will be a coverage ratio. What you principally want to achieve is show how much of your debt can be covered by your measure of income.
In terms of Leverage, what you want to explain is how much of your assets/equity/revenue/income (whatever good stuffs shareholders like) is being funded by total debt or total equity or total capital, so in theory, you could make up several types of leverage ratios on the fly, and as long as you do so consistently in your comparisions, you will end up getting the same intution/results.
But can’t debt also be in the numerator for leverage ratios? I don’t like making up rules unless they’re consistent.
Not asking you to make up rules on the fly, just providing an intution. My point is, there is no total fixed number for coverage and leverage ratios. Any ratio used to measure a company’s methods of financing or to measure its ability to meet financial obligations can be construed into either a leverage or coverage ratio.
For coverage ratios - as long as you can show how a measure of income can be used to finance a measure of obligation, then it is a coverage ratio.
For leverage ratios - as long as you can show either the % of debt in your capital structure, equity in your capital structure, or how much of your Assets/income is financed by debt/equity, then it can be construed into a leverage ratio.
But hey, if you have an approach that you understand well and works well for you - I’m happy and good!
Please see Credit Analysis foe Debt/EBITDA, its there as leverage ratios in FI.