What EBIT/Interest coverage ratio should be presumed in a leverage buyout for "back-of-the-envelope" calculation?

In the context of a leverage buyout (LBO), the EBIT (Earnings Before Interest and Taxes) to Interest coverage ratio is a crucial metric used to evaluate a company's ability to meet its interest obligations from operating earnings. A presumed ratio of 1.3 reflects a conservative yet realistic approach in financial modeling for quick, preliminary estimates.

Using a 1.3 ratio suggests that for every dollar of interest expense, the company generates $1.30 of EBIT, indicating a comfortable buffer for covering its interest payments. This is particularly important in an LBO scenario, where the company typically assumes substantial debt to finance the acquisition. A ratio of 1.3 indicates to investors that there is some margin of safety, acknowledging inherent risks while still demonstrating operational viability.

Ratios that are significantly lower may signal distress, meaning the company could struggle to meet its interest commitments. Conversely, a much higher ratio might suggest overly conservative projections or unrealistic performance expectations for a company in an LBO situation. Therefore, a 1.3 ratio is a pragmatic and balanced assumption for quick calculations in the context of leveraging financing in an acquisition context.