Business and debt stress tester
What falls in revenue, rising costs, higher interest rates and lower asset values would do to a business's cover, gearing and cash, measured against its lender's tests.
Results
A worked example from the inputs shown. With JavaScript switched on, the results change as you change the inputs.
Debt service cover
1.71x
Cash available $750k over debt service $438k. Test 1.25x: met
Interest cover
5.33x
EBITDA over interest. Test 2.0x: met
Loan to value
55.6%
Debt over a value of $4.5m. Test 65%: met
EBITDA
$1,000,000
Revenue $5m less costs $4m
Revenue could fall a further
6.8%
Before cover drops below 1.25x, with costs moving as set
Value could fall a further
14.5%
Before loan to value passes 65%
Cash after a year
$562,500
Cash on hand plus cash available, less debt service
Revenue of $5,000,000 less costs of $4,000,000 leaves EBITDA of $1,000,000.
After capital spending and tax, $750,000 is available for debt service of $437,500 ($187,500 interest and $250,000 principal): a cover of 1.71x, above the 1.25x test. EBITDA could fall a further 20.3% before the test is missed, which would take a fall in revenue of only 6.8%, because costs do not fall as fast as revenue.
Against security worth $4,500,000, debt of $2,500,000 is a loan to value of 55.6%; the value could fall a further 14.5% before the 65% limit.
The shocks are choices, not forecasts or probabilities, and the results are not a credit assessment. Lenders define and test covenants in their own way: check the definitions in your loan documents.
Show the figures
| Amount | |
|---|---|
| EBITDA | $1m |
| Capital spending | −$100k |
| Tax | −$150k |
| Cash available | $750k |
| Interest | −$188k |
| Principal | −$250k |
| Cash after debt service | $313k |
Above zero, the test is met with that much to spare; below zero, it is missed.
Show the figures
| Value | |
|---|---|
| Debt service cover | 1.71x against 1.25x |
| Interest cover | 5.33x against 2.0x |
| Loan to value | 55.6% against 65% |
Shaded by the distance from the 1.25x test: the stronger the gold, the further above it; red cells are below it. The other shocks stay as entered.
Show the figures
| Revenue change | −2 points | −1 point | 0 points | +1 point | +2 points |
|---|---|---|---|---|---|
| Revenue −20% | 0.39x | 0.36x | 0.34x | 0.32x | 0.31x |
| Revenue −10% | 1.16x | 1.09x | 1.03x | 0.97x | 0.92x |
| Revenue 0% | 1.94x | 1.82x | 1.71x | 1.62x | 1.54x |
| Revenue +10% | 2.71x | 2.55x | 2.40x | 2.27x | 2.15x |
| Revenue +20% | 3.48x | 3.27x | 3.09x | 2.92x | 2.77x |
Scenarios
Keep the base case and try other assumptions beside it. Each scenario starts from the base case and keeps only the inputs you change in it.
Before and after the shocks
| Before | After | Change | |
|---|---|---|---|
| Revenue | $5,000,000 | $5,000,000 | $0 |
| Operating costs | $4,000,000 | $4,000,000 | $0 |
| EBITDA | $1,000,000 | $1,000,000 | $0 |
| Capital spending and tax | $250,000 | $250,000 | $0 |
| Cash available for debt service | $750,000 | $750,000 | $0 |
| Interest | $187,500 | $187,500 | $0 |
| Principal | $250,000 | $250,000 | $0 |
| Debt service | $437,500 | $437,500 | $0 |
| Debt service cover | 1.71x | 1.71x | 0.00x |
| Interest cover | 5.33x | 5.33x | 0.00x |
| Value of the security | $4,500,000 | $4,500,000 | $0 |
| Loan to value | 55.6% | 55.6% | 0.0% |
| Cash after a year | $562,500 | $562,500 | $0 |
| Equity value, illustrative | $2,250,000 | $2,250,000 | $0 |
The equity value is the multiple of EBITDA less debt plus cash, for illustration only.
The full schedule, repayment by repayment, is in the downloads.
Download
The inputs, results and schedules of the scenario on screen. Files are made in your browser; nothing is sent anywhere.
What it does
A stress test asks how much could go wrong before a business stops meeting its loan's tests or runs short of cash. Enter a year of revenue and costs, the debt and its security, and the lender's minimum cover and maximum loan to value. The tester applies the shocks you choose, or one of four ready-made scenarios, and works out EBITDA, debt service cover, interest cover and loan to value, how far each is from its limit, and the cash needed if one is missed.
Costs are split into fixed and variable, so a fall in revenue takes the variable costs with it but leaves the fixed costs in place. That is why EBITDA falls faster than revenue, and why a modest fall in sales can be enough to miss a covenant. Professional mode adds a further change to EBITDA, a change in repayments and an illustrative equity value.
Understanding your results
- Debt service cover
- The cash available for debt service, EBITDA less capital spending and tax, divided by a year's interest and principal. Below 1.0 the business cannot meet its repayments from its own cash.
- Interest cover
- EBITDA divided by a year's interest: how many times over the business earns its interest bill.
- Loan to value
- Debt divided by the value of the security. When values fall, it rises without any new borrowing.
- Headroom
- How much further revenue, EBITDA or the value of the security could fall before a test is missed. Whenever some costs are fixed, the revenue headroom is smaller than the EBITDA headroom, because a 1% fall in revenue lowers EBITDA by more than 1%.
- Cash needed
- When cash available falls short of debt service, the shortfall for the year. When loan to value is above the limit, the debt that would need to be repaid, or the extra security offered, to bring it back.
The method
How this is calculated
With revenue R, operating costs C and the share of them that is fixed:
Revenue after the shock R' = R × (1 + revenue change)
Costs after = (fixed share × C + variable share × C × R' ÷ R) × (1 + cost change)
EBITDA after E = R' − costs after, then moved by any further change × its size
Interest = debt × (rate + rate change)
Principal = yearly repayments × (1 + repayment change)
Cash available = E − capital spending − tax
Debt service cover = cash available ÷ (interest + principal)
Interest cover = E ÷ interest
Loan to value = debt ÷ (value × (1 + value change))
EBITDA headroom = 1 − (minimum cover × debt service + capital spending + tax) ÷ E
Value headroom = 1 − debt ÷ (maximum loan to value × value)
The revenue headroom is found by searching for the further fall in revenue, with the other shocks as entered, at which cover reaches the minimum. Capital spending and tax stay as entered under every shock, which is cautious, since tax usually falls with profit. The equity value is an illustration: a multiple of EBITDA, less debt, plus cash. See How the tools work.
Assumptions and limitations
The defaults are an illustration: a business with $5 million of revenue and $1 million of EBITDA, half its costs fixed, $2.5 million of debt at 7.5% repaid at $250,000 a year, security worth $4.5 million, and tests of 1.25 times debt service cover, 2 times interest cover and a 65% loan to value. The tests are our assumptions; the ones in your loan documents, and how they define each figure, are what count.
The shocks are choices, not forecasts or probabilities, and the four ready-made scenarios are examples to start from. The tester looks at a single year: it does not model the timing of cash within the year, working capital, how the business would respond to a shock, or what a lender would do if a test were missed, which depends on the loan and the lender. It is general information, not financial or credit advice, and not a credit assessment.
Learn more
- Inside the credit decision: how a lender says yes or no, with the ratios it tests.
- Beyond the balance sheet: how a business's mix of fixed and variable costs changes its risk, with a model.
- Security, guarantees and the law: what a lender can take, and when.
- The commercial loan analyser, for the repayments behind the debt service, and the cash flow forecaster, for the months inside the year.