Measuring reasonability of leverage and coverage ratios

A company you’re analyzing in a potential LBO transaction has a Total Debt / EBITDA ratio ranging from 2.0x
to 3.0x over 5 years; its EBITDA / Total Interest Expense ratio ranges from 1.5x to 2.0x, and its EBITDA / Cash
Interest Expense ratio ranges from 2.5x to 3.5x. It has minimal CapEx and working capital requirements. What
might you conclude from these numbers?
a. The company’s Leverage Ratio is in a very reasonable range, but its Interest Coverage Ratio is concerning
since you generally want to see numbers above 2.0x there; if you’re close to 1.0x, the company might
run into trouble paying for its interest if there’s a downturn in its business.
b. The company’s Leverage Ratio is fine, and although its Interest Coverage Ratio seems rather low initially,
on a cash interest-basis it is in a healthy range; we would be more concerned there if the Leverage Ratio
were significantly higher.
c. The company’s Leverage Ratio is too high and its Interest Coverage Ratio is too low, so we would
recommend less debt for this deal.
d. It’s impossible to draw a meaningful conclusion without also knowing the Senior Debt / EBITDA, Net
Debt / EBITDA, and equivalent ratios for the interest coverage