Which measure is typically used to evaluate a company's risk of default?

The Net Debt/EBITDA ratio is a commonly used measure to evaluate a company's risk of default because it provides insight into a company's leverage and its ability to generate earnings to cover its debt obligations. This ratio indicates how many years it would take for a company to pay off its net debt if the earnings before interest, taxes, depreciation, and amortization (EBITDA) were used for that purpose.

When a company has a high Net Debt/EBITDA ratio, it suggests that the company may be over-leveraged relative to its earnings, indicating a higher risk of default. Conversely, a lower ratio implies that the company is in a better position to manage its debt load, as it generates sufficient earnings to cover its debts. Investors and creditors analyze this ratio to assess financial health and potential difficulties in meeting financial commitments.

The other measures listed provide insights into different aspects of a company's financial condition. For example, the Debt/Equity ratio looks at the relative proportion of debt and equity financing but doesn’t specifically evaluate default risk. The EBITDA margin assesses profitability relative to sales, while the Working Capital ratio focuses on liquidity rather than solvency and the ability to service long-term debt obligations. Hence, while these ratios are relevant to analyzing a