medium · Debt Capital Markets
Why do lenders use 'EBITDA' instead of 'Net Income' for leverage and coverage covenants?
- It provides a better proxy for the cash flow available to service debt by stripping out non-cash charges and tax effects.
- Lenders are prohibited by law from using Net Income in legal contracts.
- It is a GAAP-regulated figure that prevents companies from manipulating their earnings.
- It always results in a higher number, making the company look more profitable than it actually is.
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