Multiple based debt capacity starts off by saying we need some kind of multiple And we normally then times it by some kind of value driver (which is EBITDA) And that gets us the total amount of debt that the company can have. A widely used ratio is debt/EBITDA In the example in the blue table underneath, we've got debt/EBITDA a maximum of 5.5 times EBITDA We times that by EBITDA (1,200), gets us to a debt capacity of 6,600 An alternative that we could use is interest cover. Here we've got an interest cover of three times (EBITDA divided by interest expense) Well if my EBITDA is 1,260 and I know that's three times the interest, then I can calculate my interest expense to be 420 I also know the company's current interest rate is 6% If 6% result in interest expense of 420, I can divide the 420 by 6% to calculate max debt capacity of 7,000 Great! So that's two very quick ways that we can get to a debt capacity However we tend to think of EBITDA being intrinsically linked to debt EBITDA will be used as the cash flow to pay off debt and interest. However it's not quite as simple as that If we look at Univision, if we look at its EBITDA of 1,249 We can go through the calculation to get down to the free cash flow available for debt service That involves going to NOPAT, adding back depreciation and amortization and then subtracting any operating cash flows I can see here that the free cash flow is 771 Where as the EBITDA is 1,249 The free cash flow figure here is only 61.7% of EBITDA If we now compare that to a manufacturer like Lockheed Martin. It's EBITDA and free cash flows are much further apart Free cash flows are only 40.6% of the EBITDA, why is this? They've got very high investment in operating working capital and capex So EBITDA yes is a proxy for cash flow but it's not cash flow itself And looking at these two companies free cash flows to EBITDA calculations We can see that we can get wide discrepancies between different companies