Session 9 Flashcards
Motivations for credit analysis
Is a type of financial analysis that an investor/Bond portfolio manager performs on companies/governments/any other debt-issue entities to measure the issuers ability to meet its debt obligation
Beneficiaries of credit analysis
Customers Suppliers Banks and other lenders Equity investors Employees Investors in distressed debt Borrowers Auditors Rating agencies
Meaning of insolvency
Applied to UK companies
Bankruptcy in US
Campanies cannot pay debts as they fall due
Precursor to formal restructuring arrangements
Common causes of insolvency
Profitability low/declining Inappropriate diversification-may not have moved with the times Import penetration Gearing too high - debt > equity Geographical spread Over-trading
ROE
Net income /(common equity + preferred equity)
ROCE
=EBIT /(total debt + total equity)
Debtor days
(Trade debtors / credit sales ) x 365
Number of days it takes you to pay back debts
Creditor days
= trade creditor / credit purchases * 365
Asset turnover
Sales / (LT debt + equity capital)
How quickly you are turnover over your revenues
Total debt to cash flow
(Short term debt + long term debt)/ cash flow from operations
Total debt position manageable in relation to Cash flow from operations
Univariant predictive model
If the cash going in didn’t match the cash going out there is a problem
