C describe the role of financial statement analysis in assessing the credit quality of a potential debt investment; Flashcards
Describe the role of financial statement analysis in assessing the credit quality of a potential debt investment
1
Q
Credit analysis formulas are weighted averages of ratios and business characteristics. there are 4 general categories
A
Scale and Diversification: Bigger is better
Operational Efficiency: Higher op. eff. = better debt ratings
Margin Suitability: Stable profit margins indicate a higher prob. of repayment (a higher prob. of repayment leads to a better debt rating and a lower interest rate)
Leverage: Most Important Part: Firms w/ greater earnings in relation to their debt and in relation to their interest expense are better credit risks.
