Default risk is the chance that a company is unable to make interest payments on their debt obligations. A business with low level of Net Debt/EBITDA at a very high rate of interest may face a greater default risk than a more highly geared company facing an exceptionally low rate of interest. Interest cover is a good way to capture this risk.
= Earnings before interest and tax/Interest
In theory, the definitions of an investment or an expense seem quite clear cut. An investment, so the theory goes, is spending which creates an asset which will help produce profits over a number of…
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