Private Credit Mathematics and Terms

For in depth analysis equations and ratios that give you a well rounded view of the business

Revenue Growth

Revenue_t = Revenue_{t-1} × (1 + g)

EBITDA

Revenue × EBITDA Margin

Depreciation

Depreciation_{t-1} × (1 + Depreciation Growth Rate) OR Revenue × Depreciation%

EBIT

EBITDA – Depreciation

Interest

Beginning Debt × Interest Rate

Taxes

(EBIT – Interest) × Tax Rate

Net Income

EBIT – Interest – Taxes

Working Capital

Revenue × WC%

Change in WC

WC_t – WC_{t-1}

WC increase

use of cash

WC decrease

source of cash

Capex

Revenue × Capex%

CFO

Net Income + Depreciation – change in WC

Free Cash Flow

EBITDA – Capex – Taxes – ∆WC

Beginning Debt_t

Ending Debt_{t-1}

Amortization

Fixed Annual Principal Payment

Ending Debt

Beginning Debt – Amortization

Ending Cash

Beginning Cash + CFO – Capex – Amortization

Beginning Cash_t

Ending Cash_{t-1}

Debt Service

Interest + Amortization

DSCR

FCF / Debt Service

Interest Coverage

EBITDA / Interest

Leverage

Total Debt / EBITDA

Net Leverage

(Debt – Cash) / EBITDA

FCF Conversion

FCF / EBITDA

Unlevered FCF

EBITDA – Capex – ∆WC – Taxes on EBIT

Enterprise Value

EBITDA × Exit Multiple

Equity Value

EV – Net Debt

1.0x leverage

EBITDA equivalent

FCF ≈

60% of EBITDA

Working capital needs ≈

1% of revenue for service businesses

Revenue Growth (concept)

How fast the business is expanding. Higher growth → higher future cash flow → more debt capacity. Declining revenue is a major credit red flag.

EBITDA (concept)

Shows how much profit a business generates from core operations before factoring in non-operating items. It is the foundation for evaluating debt capacity and serviceability.

Depreciation (concept)

Reflects the loss of value in long-term assets over time. It lowers taxable income but does not involve an actual cash outflow.

EBIT (concept)

Indicates a company’s operating profit after accounting for non-cash asset wear. It is used to assess tax burdens and the resilience of operating earnings.

Interest Expense (concept)

Represents the cost of borrowing. Higher borrowing costs reduce cash available for obligations and increase financial risk.

Taxes (concept)

Reflect the mandatory government payment based on profit. They reduce how much operating profit is available to turn into cash.

Net Income (concept)

Shows the accounting bottom line. It includes many non-cash items and therefore is not a reliable measure of a borrower’s real ability to meet obligations.

Working Capital Level (concept)

Represents how much money is tied up in day-to-day operations. Growing businesses typically require more, which reduces short-term liquidity.

Change in Working Capital (concept)

Measures whether operations are absorbing or releasing cash. An increase means more cash is trapped inside the operating cycle; a decrease means cash is freed up.

Capex (concept)

Represents cash invested into long-term assets to maintain or expand operations. Higher investment reduces cash available for obligations.

CFO (concept)

Shows how much cash the company actually produces from its core operations after adjusting for taxes and working capital needs.

Free Cash Flow (concept)

Represents the money left over after covering operating needs and capital investment. This is the pool available for servicing obligations and is the single most important credit metric.

Beginning-of-Period Debt (concept)

Indicates the amount owed at the start of a period; used to calculate interest and repayment capacity.

Amortization (concept)

Refers to the required annual reduction in the loan balance. Larger reductions strain cash flow; smaller ones preserve liquidity.

Ending-of-Period Debt (concept)

Shows the remaining loan balance after required reduction. Lower balances increase future repayment security.

Ending Cash Balance (concept)

Represents the liquidity left after operational activity, investment spending, and debt service. Reflects immediate financial flexibility.

Next-Year Beginning Cash (concept)

Carries forward available liquidity to the next forecast period ensuring continuity in cash analysis.

Debt Service (concept)

Represents all required payments a borrower must make to remain current on obligations. A key determinant of short-term survival.

DSCR (concept)

Indicates the borrower’s ability to generate enough money to meet required payments. Higher values signal safety; lower values suggest potential inability to pay.

Interest Coverage (concept)

Measures how easily a business can handle its borrowing costs using operating earnings. Indicates resilience to rising rates or earnings volatility.

Leverage Ratio (concept)

Shows how heavily a company is financed relative to its operating earnings. Higher values imply greater lender risk.Net Leverage (concept)

Net Leverage (concept)

Accounts for available liquidity when evaluating how burdensome obligations truly are. Demonstrates whether cash meaningfully offsets risk.

FCF Conversion (concept)

Shows what proportion of operating earnings becomes true cash. Higher values indicate efficiency and strong liquidity.

Unlevered FCF (concept)

Represents the pure cash output of the business before financing effects. Useful for understanding inherent performance independent of capital structure.

Enterprise Value (concept)

Represents the total economic worth of the business. Used by lenders to understand how much protection exists beneath them.

Equity Value (concept)

Shows the cushion provided by ownership. Larger cushions protect lenders from declines in performance or valuation.

Underwriting Assumptions in order

Starting Revenue

Revenue Growth Rate

EBITDA Margin

Beginning Cash Balance

Working Capital as % of Revenue

Capex as % of Revenue

Depreciation (Dollar Amount or % of Revenue)

Tax Rate

Original Debt Amount

Interest Rate

Annual Principal Amortization

Loan Term (Years)

Cash Buffer Target (Optional but Common)

Exit EBITDA Multiple (Optional Underwriting Input)

Scenario Toggle (Base, Downside, Upside)

Sensitivity Variables (Optional: margin stress, growth stress, rate stress)