What Does Turn of Leverage Mean?
A turn of leverage or a turn of debt describes an organization's debt to EBITDA leverage ratio. It is also known as yield per turn of leverage. For example, two turns of debt means that the company's leverage ratio is 2x. This ratio is commonly used to calculate the ability of an organization to pay-off its debt, and the approximate time within which it can pay off all its debt. This metric is used by credit agencies and stakeholders to identify the organization's probability of default on its debts. In general, a higher value indicates that a firm may not be able to service its debt appropriately,
Turn of leverage is calculated as Debt/EBITDA.
Divestopedia Explains Turn of Leverage
A turn of leverage or a turn of debt is a ratio that compares financial borrowings and the income needed to service it without taking into consideration interest, taxes, depreciation and amortization. Since it evaluates the earnings and debt, it is a good ratio for calculating the business value of an organization too, besides its ability to service its debt.
This ratio can be used to compare the debt serviceability of one organization with another, provided that both the organizations are located within the same industry. It is also commonly used by private equity firm when describing how an acquisition will be financed. For example, a business with a valuation multiple of 5x EBITDA might be financed with three turns of debt and two turns of equity in a leveraged buy-out.
This ratio is also widely used by credit agencies, financial analysts and others who want to know the financial soundness of a particular organization. It is also used in management decisions, especially when another company is looking to bid, acquire or take over another company.