The situation
Net debt is ₹96 crore and EBITDA is ₹40 crore. The agreement caps net debt/EBITDA at 3.0×. Assume net debt stays fixed.
Your task
What is current ratio headroom and the minimum EBITDA?
Reveal step-by-step solution
Set up the problem
Current ratio = ₹96 ÷ ₹40 = 2.40×. Ratio headroom is 0.60×.
Work through the numbers
At the limit, EBITDA = ₹96 ÷ 3.0 = ₹32 crore.
Interpret the result
EBITDA can fall ₹8 crore, or 20%, before reaching the cap. Revisit the result if debt or covenant definitions change.
What to remember
Work backwards from the exact covenant definition and specify what remains fixed in the sensitivity.