Vol. 3 LM4 Credit Analysis & Geographic Segments Flashcards
Concept
is the risk of loss caused by a counterparty’s or debtor’s failure to make a promised payment
p. 235
credit risk
Concept
is the evaluation of credit risk
p. 235
credit analysis
Concept
a statistical analysis of the determinants of credit default
p. 235
credit scoring
Concept
can be either long-term or short-term and is an indication of the rating angency’s opinion of the creditworthiness of a debt issuer with respect to a specific debt security
credit rating
Concept
involves both the analysis of a company’s financial reports as well as a broad assessment of a company’s operations
p. 236
credit rating process
Describe
(industry level) qualitative factors of a corporate credit rating
p. 236
industry level
* growth prospects
* volatility
* technological change
* competitive environment
Describe
(company level) qualitative factors of a corporate credit rating
p. 236
company level
* operational effectiveness,
* strategy
* governance
* financial policies
* risk management practices
* risk tolerance
Describe
quantitative factors of a corporate credit rating
p. 236
generally include:
* profitability
* leverage
* cash flow adequacy
* liquidity
Calculate
EBITDA interest coverage
p. 236
numerator EBITDAb
denominator interest expense, including non-cash interest on conventional debt instruments
b EBITDA = EBIT, depreciation, and amortization
Calculate
FFOc (funds from operations) to debt
p. 236
numerator FFO
denominator total debt
c EBITDA - net interest expense - tax expense
Calculate
Free operating cash flow to debt
p. 236
numerator CFOd (adjusted) minus capital expenditures
denominator total debt
d CFO = cash flow from operations
Calculate
EBIT margin
p. 236
numerator EBIT
denominator total revenues
Calculate
EBITDA margin
p. 236
numerator EBITDA
denominator total revenues
Calculate
debt to EBITDA
p. 237
numerator total debt
denominator EBITDA
p. 237
Calculate
return on capital
p. 237
numerator EBIT
denominator Average beginning-of-year and end-of-year capital
Calculate
Altman’s Z-score to predict financial distress
p. 237
Z = 1.2 x (Current assets - current liabilities)/Total assets +
* 1.4 x (Retained earnings/Total assets)
* + 3.3 x (EBIT/Total assets)
* + 0.6 x (Market value of stock/Book value of liabilities)
* + 1.0 x (Sales/Total assets)
Define
operating segment
p. 238
- that engages in activities that may generate revenue and create expenses, including a start up segment that has yet to earn revenues
- who results are regularly reviewed by senior management
- for which discrete financial information is avialable
List
a company must disclose separate information about any operation segment under which conditions
p. 238
- the segment constitutes 10 percent or more of the combined operation segments’ revenue, assets, or profit
- the criteria is expressed in terms of the absolute value of the segment’s profit or loss as a percentage of the greater
a. the combined profits of all profitable segments and
b. the absolute amount of the combined losses of all loss-making segments
List disclosures
each reportable segment
p. 238
- a measure of profit or loss;
- a measure of total assets and liabilities
- segment revenue, distinguishing between revenue to external customers and revenue from other segments
- interest revenue and interest expense;
- cost of property, plant, and equipment, and intangible assets acquired;
- depreciation and amortisation expense;
- other non-cash expenses;
- income tax expense or income; and
- share of the net profit or loss of an investment accounted for under the equity method
List
segment ratios
p. 239
- segment margin
- segment turnover
- segment ROA
- segment debt ratio
Concept
also known as “what if” analysis, which shows the range of possible outcomes as specific assumptions are changed; this could, in turn, influence financing needs or investment in fixed assets
p. 242
sensitivity analysis
Concept
This type of analysis shows the changes in key financial quantities that result from given (economic) events, such as the loss of customers, the loss of a supply source, or a catastrophic event
p. 242
scenario analysis
Concept
This is computer-generated sensitivity or scenario analysis based on probability models for the factors that drive outcomes
p. 242
simulation
P1
Comparison of a company’s financial results to other peer companies for the same time period is called:
A. technical analysis.
B. time-series analysis.
C. cross-sectional analysis.
Practice Problems
p. 245
C. cross-sectional analysis