Will Carvana's net debt to adjusted EBITDA ratio remain at or below 2.0x as of Q1 2026?

The ratio improved from 1.5x to 1.3x, widening the cushion to 2.0x from 0.5x to 0.7x. This is not merely maintaining trajectory — the deleveraging accelerated. With $709M in corporate notes retired in FY2025 and management explicitly targeting 'investment-grade quality credit ratios,' the direction is unambiguous. For the ratio to breach 2.0x by Q1 2026 (just one quarter away), EBITDA would need to collapse by ~35% or net debt would need to increase by ~$1.4B — neither is remotely plausible absent a catastrophic event. The stress-scanner's -20% volume scenario only reaches ~2.0x, and that represents a severe sustained shock, not a single-quarter fluctuation. The Q4 EBITDA margin dip to 9.1% from reconditioning costs is a transient headwind with management guiding 3-6 month resolution.

The Q4 2025 data resolves the key uncertainty from the initial prediction — data staleness. We now have confirmed FY2025 figures: 1.3x leverage, $2,187M EBITDA, $2,327M cash, ~$4,930M total debt. The ratio improved despite Q4 EBITDA margin declining to 9.1%, demonstrating that volume growth (+43% units) more than offset margin compression. With only one quarter remaining to resolution, the math is stark: net debt would need to increase by ~$1.4B or TTM EBITDA would need to fall by ~$750M to breach 2.0x. No near-term debt maturities (concentrated in 2028-2031), no buybacks, no dividends — all cash flow is directed at deleveraging. The reconditioning headwind is the only new negative, but management's 3-6 month guidance suggests resolution by mid-2026, and the volume growth trajectory provides EBITDA cushion regardless.

The previous prediction weighted the unresolved debate about 2022-2023 EBITDA stress performance. The Q4 2025 data partially resolves this: even with Q4 margin compression (9.1% vs 10.1%), the company generated massive EBITDA because unit volume growth (+43%) overwhelmed margin pressure. This demonstrates EBITDA resilience through volume, not just margin. The $709M in debt retirement during FY2025 — while simultaneously growing the business — shows genuine free cash flow generation. The TRA liability ($2,228M) is explicitly NOT debt and cannot trigger default, removing a potential confusion factor. With 0.7x cushion, no near-term maturities, and only ~90 days to resolution, the probability of YES has materially increased from the prior 86%.

The material update is unambiguously positive for this market. Net debt/EBITDA improved from 1.5x to 1.3x, expanding the cushion to 0.7x from 0.5x. The key metrics all moved in the right direction: total debt down ($5.7B to $4.9B), cash up ($2.1B to $2.3B), EBITDA confirmed at $2,187M. Management's explicit targeting of 'investment-grade quality credit ratios' signals continued deleveraging intent. The only negative is Q4 EBITDA margin compression (9.1% vs 10.1%) from reconditioning costs, but this was more than offset by 43% unit growth. With only one quarter remaining, the path to breach would require an extraordinary shock — the stress-scanner's severe -20% volume scenario only reaches the 2.0x threshold, and that represents sustained multi-quarter stress, not a single-quarter event.

While the update is clearly positive, several factors prevent me from pushing probability above 90%. First, the Q4 EBITDA margin decline (9.1% vs 10.1%) signals reconditioning cost headwinds that management says will take 3-6 months to resolve — this timeline extends squarely into Q1 2026, meaning Q1 EBITDA margins could face continued pressure. Second, the FUNDING_FRAGILITY classification of STRETCHED (from the 8-lens update) suggests structural funding risks remain even if flow metrics are strong. Third, the stress-scanner found that a -20% volume decline pushes leverage to exactly 2.0x — meaning the cushion, while wider, is not as robust as it appears if both volume and margin compress simultaneously. The sibling market calibration shows our previous predictions were reasonably well-calibrated (Brier 0.23 and 0.03), so the prior 86% was not systematically biased.

The improvement from 1.5x to 1.3x over just one quarter demonstrates that the deleveraging is accelerating, not decelerating. With confirmed FY2025 EBITDA of $2,187M and total debt at ~$4,930M, the math for Q1 2026 is straightforward: even if Q1 2026 EBITDA declines modestly (say $500M quarterly vs $547M Q4 implied average), the TTM EBITDA would remain well above $2,000M, and with continued debt retirement, net debt/EBITDA would stay comfortably below 2.0x. The no-buyback, no-dividend policy means all excess cash flow goes to debt reduction. The debt maturity profile (2028-2031) eliminates refinancing risk for the resolution period. The CAPITAL_DEPLOYMENT: DISCIPLINED classification from the 8-lens update confirms management is prioritizing balance sheet repair.

Net debt/EBITDA improved to 1.3x with 0.7x cushion to the 2.0x threshold. Only one quarter remains to resolution. $709M debt retired in FY2025 with management targeting investment-grade credit ratios. Cash increased to $2,327M. Even the severe stress scenario (-20% volume) only reaches ~2.0x. With no near-term maturities and no capital returns, the path to breach requires an unprecedented single-quarter shock. Probability should be materially higher than the prior 86%.

The update is clearly positive — ratio improved from 1.5x to 1.3x, all key balance sheet metrics strengthened. However, the Q4 EBITDA margin compression (9.1% vs 10.1%) and reconditioning headwinds extending into Q1 2026 are worth noting. The FUNDING_FRAGILITY: STRETCHED classification suggests that while current flow metrics are strong, structural funding risks persist. Still, the 0.7x cushion with only ~90 days remaining makes a breach extremely unlikely absent a severe macro shock.

Confirmed FY2025 figures are unambiguously positive: 1.3x leverage, $2,187M EBITDA, $2,327M cash, $709M debt retired. Management is explicitly targeting further deleveraging. One quarter remains. The 0.7x cushion would require ~35% EBITDA decline or ~$1.4B new debt to breach. Neither scenario is plausible within 90 days given the current trajectory and capital deployment discipline.