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Gross leverage ratio compares debt before cash offsets with a stated earnings measure. Rebuild the calculation from a debt schedule and income statement, reconcile the inputs, and distinguish gross from net leverage.
Gross leverage ratio is debt before cash offsets divided by a stated earnings measure, usually trailing twelve-month EBITDA or adjusted EBITDA. It measures the size of included borrowing relative to earnings, so both the debt boundary and the earnings definition belong beside the result. A lower multiple can reflect debt repayment, stronger earnings, or a change in those definitions.
Gross leverage ratio = Included gross debt at the reporting date / EBITDA for the stated period
Gross leverage on adjusted EBITDA = Included gross debt / Adjusted EBITDA
Show the result in times, such as 2.50x. Keep an ordinary EBITDA calculation separate from one containing additional adjustments. The SEC's non-GAAP guidance, Questions 103.01 and 103.02, starts EBITDA from GAAP net income and distinguishes differently calculated measures, such as adjusted EBITDA.
Use principal outstanding if that is your policy. Identify separately any discount, premium, or debt issuance costs that explain a difference from the ledger carrying amount. Decide whether finance leases, operating leases, guarantees, overdrafts, or other financing obligations are included. Unused borrowing availability is not funded debt in the example below.
There is a real distinction between gross and net measures. For example, Peloton's fiscal 2026 second-quarter earnings release defines gross leverage using gross principal debt and trailing adjusted EBITDA; its net version deducts cash and cash equivalents. That is an issuer's stated convention, not a definition every company must adopt.
Bring a debt schedule with lender, instrument, borrower, currency, reporting date, outstanding principal, ledger carrying amount, and inclusion flag. Include current maturities without counting them again inside the long-term balance. A separate cash schedule supports a net comparison but does not reduce gross debt.
Bring an income statement covering the same consolidated entities and the trailing earnings period. Add a bridge from net income to EBITDA, with every adjustment identified by account or supporting schedule. An acquisition can introduce debt immediately while contributing earnings for only part of the year; show any permitted pro forma treatment explicitly.
Use the same period end across entities. Cadence and recency explains why a current debt balance paired with an old earnings export needs a visible date warning.
Consider a US industrial distributor at September 30, 2026. All amounts are USD. The management definition includes funded borrowing and finance leases, excludes operating lease liabilities, and uses outstanding principal before financing costs.
| Debt schedule row | Included principal (USD) | Treatment |
|---|---|---|
| Term loan, including current maturities | 9,000,000 | Included once |
| Revolver drawn balance | 2,000,000 | Include funded amount |
| Senior notes | 4,000,000 | Include principal |
| Finance lease obligations | 1,000,000 | Included by stated policy |
| Gross debt | 16,000,000 | Sum of included rows |
The income statement bridge covers October 1, 2025, through September 30, 2026. Each amount below is a positive add-back to net income, and depreciation and amortization have not already been added elsewhere.
| Earnings bridge step | Amount (USD) | Running total (USD) |
|---|---|---|
| Net income | 2,000,000 | 2,000,000 |
| Add interest expense | 1,200,000 | 3,200,000 |
| Add income tax expense | 800,000 | 4,000,000 |
| Add depreciation | 1,500,000 | 5,500,000 |
| Add amortization | 500,000 | 6,000,000 |
| EBITDA | 6,000,000 | |
| Add separately supported adjustment | 400,000 | 6,400,000 |
| Adjusted EBITDA | 6,400,000 |
Management's adjustment is an illustrative policy assumption. Its presence in a workbook does not establish that a lender accepts it.
| Calculation | Arithmetic | Result |
|---|---|---|
| Gross debt / EBITDA | 16,000,000 / 6,000,000 | 2.67x |
| Gross debt / adjusted EBITDA | 16,000,000 / 6,400,000 | 2.50x |
Multiples are rounded to two decimal places after division. The borrowing is identical in both rows. The lower second figure comes entirely from the denominator adjustment.
In a spreadsheet, sum included principal before dividing. If included debt is in B2:B5 and the final adjusted earnings value is in E9:
=SUM(B2:B5)/E9
Never average entity multiples to get the group result. Sum debt and matching earnings first; count-weighted and value-weighted ratios explains why the denominator determines the appropriate weighting.
First reconcile the debt schedule to accounting and movement records:
| Reconciliation | Arithmetic (USD) | Closing principal (USD) |
|---|---|---|
| Carrying amount plus unamortized issuance costs | 15,700,000 + 300,000 | 16,000,000 |
| Opening principal plus draws less repayments | 15,400,000 + 2,000,000 - 1,400,000 | 16,000,000 |
These are alternative checks of the same balance. Both must reach the debt numerator. A difference needs an explanation such as a missing instrument, exchange-rate movement, or noncash lease addition.
Next reverse the earnings bridge. Adjusted EBITDA of $6,400,000 less the $400,000 adjustment, $500,000 amortization, $1,500,000 depreciation, $800,000 tax, and $1,200,000 interest returns net income of $2,000,000. Keep the adjustment support alongside that tie.
Suppose qualifying cash is $3,000,000. The net comparison, using the same adjusted denominator, is:
| Measure | Arithmetic | Result |
|---|---|---|
| Gross leverage | 16,000,000 / 6,400,000 | 2.50x |
| Net debt (USD) | 16,000,000 - 3,000,000 | 13,000,000 |
| Net leverage | 13,000,000 / 6,400,000 | 2.03x |
The exact difference between the multiples is qualifying cash divided by adjusted EBITDA. That identity checks the gross-to-net bridge before rounding.
The senior leverage ratio narrows debt according to contractual ranking and definitions. Deciding how much leverage a business should target belongs in the separate optimal leverage ratio analysis, where cash requirements and downside conditions matter.
Bring your debt schedule, income statement, and adjustment bridge to Covirage in a file or Google Sheet. Covirage maps the columns, its tools compute and check the figures, and the external AI model explains the result with every figure traced to its rows. Create a free Covirage account and bring a sample of your own export.
See Covirage for finance teams for the supporting finance workflow.
No. Gross leverage retains the included debt balance before cash offsets. Net leverage subtracts the cash permitted by the chosen definition. Restricted cash, operating cash requirements, and agreement limits can affect which cash qualifies for a net measure.
That depends on the stated definition. Record finance leases, operating leases, and other obligations separately, then identify which enter the calculation. Compare entities using matching debt and earnings boundaries rather than assuming every lease belongs in every ratio.
No. Gross debt to EBITDA compares a balance-sheet obligation with earnings over a period. Debt to equity compares debt with shareholders' equity at a reporting date. The denominators answer different questions and the resulting multiples are not interchangeable.
A negative denominator can produce a negative multiple even when substantial debt remains outstanding. Mark the ratio as not meaningful for ordinary leverage comparisons, show the debt balance, and examine liquidity and debt-service cash flow separately.