Fundamentals of Credit Analysis Flashcards
What are the leverage ratios used for credit analysis
Debt/capital. Capital is the sum of total debt and shareholders’ equity. The debt-to-capital ratio is the percentage of the capital structure financed by debt. A lower ratio indicates less credit risk. If the financial statements list high values for intangible assets such as goodwill, an analyst should calculate a second debt-to-capital ratio adjusted for a write-down of these assets’ after-tax value.
Debt/EBITDA. A higher ratio indicates higher leverage and higher credit risk. This ratio is more volatile for firms in cyclical industries or with high operating leverage because of their high variability of EBITDA.
FFO/debt. Because this ratio divides a cash flow measure by the value of debt, a higher ratio indicates lower credit risk.
FCF after dividends/debt. Greater values indicate a greater ability to service existing debt.
