A lender's model should explain how the borrower meets its obligations. EBITDA is a starting measure, not the amount available to repay principal. Define the earnings figure and trace taxes, capital requirements, working capital and financing payments.
Build the cash bridge
For an original fictional case, assume underwritten EBITDA of $21 million, cash taxes of $3 million, maintenance capex of $4 million and working-capital investment of $2 million. Opening debt is $80 million, cash interest is 10% of opening debt and year-end scheduled principal is $4 million.
| Step | Cash remaining |
|---|---|
| EBITDA | $21m |
| After taxes | $18m |
| After maintenance capex | $14m |
| After working-capital investment | $12m |
| After $8m cash interest | $4m |
| After scheduled principal | $0m |
EBITDA/cash interest is 2.63x, but no surplus remains after the listed obligations. The ratio and the cash bridge answer different questions. Label every coverage measure rather than calling all of them “debt-service coverage.”
Stress the connected assumptions
Reduce EBITDA to $18 million, taxes to $2 million and increase working-capital investment to $3 million. Keep capex, interest and principal unchanged. Cash after scheduled principal becomes negative $3 million.
The next question is whether opening unrestricted cash and usable financing cover the shortfall while preserving minimum operating cash. An annual closing balance can conceal an earlier seasonal trough, so timing may need to be modeled monthly.
Common modeling mistakes
Do not subtract a cash cost twice if it is already captured in the starting measure. Do not omit implementation payments while accepting a restructuring add-back. Separate growth and maintenance capex where evidence permits, but do not assume “growth” spending is automatically discretionary if revenue depends on it.
Use the debt balance and interest timing specified by the case. Opening-balance interest is a simplification; a live agreement may require daily calculations and different day-count conventions.
Turn the output into a decision
A useful recommendation identifies the shortfall, the available liquidity and the conditions needed before approval. Lowering leverage can help, but it does not automatically solve a cash-conversion problem.
See the broader underwriting test guide for the assessment workflow. The Private Credit Underwriting Workbook contains the full worked lesson, two capstones and recovery exercises. Its sample includes actual pages and a complete answer.