The Company Fundamental Analysis and the Default Risk Ratio

  •  Pasquale De Luca    


The default risk ratio (DRR) proposed in this paper tries to define a novel alternative approach to analyze the company capability to face debt obligation by deriving it on the basis of fundamental analysis of the firm rather than the volatility of the asset’s value on the market.

The DRR is defined on the basis of the relationship between debt level and the economic and financial dynamics with regard the Operating and Net Income, Capital Invested and Capital Structure and Free Cash-Flow from Operations and to Equity.

The DRR does not define directly the default probability, but it is able to monitoring at a definite time the relevance of the debt level of the firm’s capability to face it, on the basis of its effects on the economic and financial dynamics of the firm. Since the DRR is based on the firm’s fundamental analysis, it can be used also in the structured-form models.

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