Very important measure - Debt / EBITDA or Debt / free cash flow- investors use to determine how much debt a corporation can support
The Citigroup report referenced in this article makes a crucial point: Corporate America faces a bigger debt burden today than before the crisis began. Total debt may be down slightly, but earnings to service that debt have crashed. Debt / Income is just another formula to measure leverage. Mortgage lenders use the formula to determine how large a mortgage a borrower can support; debt investors use a variant of it (Debt / EBITDA or Debt / free cash flow) to determine how much debt a corporation can support. Anyway, the point of the Citi report is that if the formula was flashing pink when the crisis started, it is now flashing red. The numerator (debt) is the same, but the denominator (earnings) is much lower, which means leverage is actually higher than before the crisis started. If debt-deflationary depression is our future, we’re probably only in the early stages of it…
Thanks to Option Armageddon
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