GCIB Credit Assessment Pre-Reading Flashcards
In GCIB credit, what is the major product provided to clients?
In GCIB Credit, a loan is one of the primary products we provide to our clients.
What are loans used for by companies?
Loans are generally used by companies to finance either:
(i) day-to-day business activities
or
(ii) major transactions such as acquisitions.
How long do bofa provide loans for?
We provide these loans for a fixed term, usually from 1-year up to 5-years.
What is the purpose of performing a credit analysis?
When we are considering whether or not to make a loan, we perform credit analysis to answer one very important question: “Do we think the client can pay us back in time?”
What are some questions that a qualitative analysis of credit may answer?
Are the current trends in the client’s industry positive or negative, particularly in light of any susceptibility to economic cycles? What is the company’s position relative to its competitors? Is the management team strong? What are the company’s strategic objectives and do we agree with them? Are there any major events, e.g. acquisitions that are likely to impact the company’s risk profile?
What are some questions that a quantative analysis of credit may answer?
Do we expect the company’s sales to decline, remain flat or grow? Will the revenue trends support increasing profitability? Will cash flow be sufficient to pay for investment in the business, with enough left over to pay debt obligations, including our loan? In order to answer these quantitative questions, we conduct detailed analysis of the financial statements.
What information does the income statement provide?
Provides a detailed analysis of how a company has generated its profit (or loss) for the accounting period (e.g. one year)
In the income statement, what do ‘sales’ represent in principle?
In principle, sales represents volume multiplied by price of goods and services sold to customers.
i.e.
Sales = Volume of goods * Price of goods
In the income statement, how is EBIT/Operating Profit calulated, and what is it?
Below sales, costs are subtracted to get to operating profit or Earnings Before Tax and Interest (EBIT). This is a measure of profit on the underlying, day-to-day business activities of the company.
In the income statement what does EBIT get adjusted for?
After this, profit is adjusted for financial income and costs that depend on how the company manages its cash and debt, i.e. they reflect financial policy rather than business prospects.
What is the balance sheet?
The balance sheet is the statement of a company’s financial position at a specific point in time (e.g. year-end).
One side shows what the company is worth to its shareholders (liabilities + owners’ equity). The other side shows us how the value is created (assets).
What is a Non-current asset?
Non-current assets/long-term assets are assets which are expected to last longer than a year.
What is an intangible non-current asset/
Assets with no physical form like: brands, goodwills, R&D etc.
What is a Current Asset?
A Current Asset is one whihc can be liquidated within a year.
What is a Cash Flow Statement and what does it show?
Provides a detailed analysis of how a company has generated and used its cash during an accounting period.
In the cash flow statement, note the three key categories: cash from or used in:
(i) operating activities,
(ii) investing activities and
(iii) financing activities
The sum of these results in the change in cash for the period. Note that the ending cash balance for 2018 matches the amount shown on the balance sheet above.
What is Amrotization?
The accounting process of allocating the cost of intangible assets to current expense in a systematic and rational manner in those periods expected to benefit from the use of the asset.
What is Working Capital?
The amount of capital invested into your company’s operating cycle (day-to-day operations).
What are the 5 key metrics that bofa use to analyse financial statements?
- Sales Growth
- EBITDA
- Total Debt
- Capital Expenditures
- Free Cash Flow
What is Sales growth and how is it calculated?
Indication of whether demand for a company’s goods/services is increasing or declining over time.
(Sales in the current year/Sales in the prior year - 1) * 100%
The sales in the current year and the sales in the prior year can be found in the income statement.
What is EBITDA and how is it calculated?
Similar to operating income, but adjusted to reach a number that is closer to cash earnings. The primary adjustment is to add back non-cash depreciation & amortisation costs (D&A).
EBIT + Depreciation + Amortisation
EBIT or Operating Profit can be found in the income statement.
Depreciation and Amortisation can be found in the Cash Flow Statement (sometimes in the notes to financial statements).
What is the Total Debt and how is it calculated?
All borrowings that a company must repay in time, e.g. bonds and bank loans.
Short-Term (or Current) Borrowings + Long-Term (or non-Current) Borrowings (also called financial liabilities) = Total Debt
Short/Long-Term debt can be found in the Balance Sheet.
What are Capital Expenditures and how are they calculated?
Cash outflow that is used to support the business. Example: a company invests cash on production capacity to support growth. A company may also expend cash to keep existing facilities operating well.
Capital expenditure (also known as Purchases of property, plant and equipment + Purchases of intangible assets)
Found in the Cash Flow Statement
What is Free Cash Flow and how is it calculated?
Net cash generated from or used in a company’s major operating and investing activities. Gives an estimate of cash available to make debt repayments and pay dividends to shareholders. The number used for cash from operating activities should be after tax and interest payments.
Net cash from operating activities – capital expenditures
Found in the Cash Flow Statement.
What is a Profability ratio?
Profitability ratios measure a company’s return on sales, assets or equity. These ratios help us with risk analysis because they provide good information on a company’s operating management. They can also provide some indication of a company’s ability to generate consistent cash flow in order to meet financial obligations.
For purposes of the case study, we will look at an example of a return on sales ratio (or sales margin). This type of ratio measures how well a company manages its costs relative to its generation of sales.
