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It's just the company's assumed maximum leverage multiplied by its LTM EBITDA less current net debt. It explains what you just mentioned -- maximum borrowing capacity -- in terms of a dollar amount.
Can you please give me an example? How would I derive the company's maximum leverage?
Can you please give me an example? How would I derive the company's maximum leverage?
Off the top of my head, you'd look at recent LBOs and refis for comparable companies. Look at the leverage (net debt/EBITDA) which those deals were done at.
For recent deals, you'd wants at least 2-3 good comps (preferable pure play companies) and 4 - 5 in similar sectors (similar industry maturity and growth prospects, comparable competitive positions).
From that comp set, you can then say "A company like our company should be able to lever up to [ ] - [ ]x EBITDA".
Then compare that to your current leverage level.
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