Question
The default risk ratio (defined as cash flow from operations divided by the combined annual principal payments on all outstanding loans; a company's cash flow
The default risk ratio (defined as cash flow from operations divided by the combined annual principal payments on all outstanding loans; a company's cash flow from operations equal to net profit plus depreciation. This credit-worthiness measure has the third most important weighting in determining a company's credit rating. A company with a default risk ratio below 2.0 is automatically assigned "high risk" status (because it lacks a comfortably large cash cushion to cover its upcoming principal payments). Companies with a default risk ratio between 2.0 and 4.0 are designated as "medium risk", and companies with a default ratio of 4.0 and higher are classified as "low risk" because their prior cash flows from operations were 4 or more times the size of their annual principal payments).
What can a company do to go from being designated as "high risk" of default to be designated as "medium risk?"
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