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Quantitative Risk Analysis - Coggle Diagram
Quantitative Risk Analysis
The Purpose
Business Characteristics
The business is sufficiently liquid that it can easily meet short-term obligations.
Business runs efficiently.
The business is profitable.
The owner's stake in the business is high; or, the business doesn't carry too much debt.
Factor for Future Repayment
Trend (time series) analysis, which is to examine a company against past data or trends, such as ratios calculated in the past.
A safety buffer that helps businesses even in the event of default as they store surplus income
Stress testing, where lenders will conduct sensitivity tests on borrowers
Industry analysis to see if other industries are doing well, which can help lenders see if a borrower's business will also grow
Economic analysis, which is more about domestic and international trade
The Insurance to Prevent Risk
i. Collateral
ii. Charge on assets
iii. Guarantee
iv. Conditions
Analysis of Financial Statement
Cross-Sectional Techniques
Financial Ratio
Liquidity Ratios
Current Ratio
Quick Ratio
Efficiency Ratios
Inventory Turnover Ratio
Average Collection Period
Profitability Ratios
Gross Profit-Sales Ratio
Net Profit-Sales Ratio
Leverage Ratios
Debt-Equity Ratio
Interest Coverage Ratio
(Fixed Charge Coverage Ratio)
Common Size Statement
Intercompany comparisons are required, companies of different sizes make it difficult to compare them unless their financial statements are presented in a common form.
The common form is created by expressing the components of the balance sheet and income statement as a percentage of total assets and total income.
Time Series Techniques
Time series analysis involves analyzing financial information, such as ratios over time.
Trend (Index Statement)
Trends in Financial Ratio
Variability Measure
Variability Measures
(Maximum Value - Minimum Value)/ Mean Financial Ratio
Combining Financial Statement and Non-Financial Statement Information
Change in Market Value
Market Perceptions via Share Price
Change in Key Management
Impact of Macroeconomic Changes
10 Financial Ratios Importance in Loan Assessment by Loan Officers
Professor Altman's Formula
Altman Z-Score = [1.2 x (working capital / total assets)] + [1.4 x (retained earnings / total assets)] + [3.3 x (earnings before interest and tax / total assets)] +[ 0.6 x (market value of equity / total liabilities)] + [1.0 x (sales / total assets)].
Debts-Equity Ratio
Current Ratio
Cashflow to Long-Term Liabilities
Fixed Charge Coverage Ratio
Net Profit after Tax
Net Interest Earned
Net Profit before Tax
Financial Leverage
Inventory Turnover in Days
Account Receivables Turnover in Days
Advantages
Ability to Detect Patterns
Financial Statements showing the Company's Annual Sales.
Sales can Fluctuate, but Financial Planners should be able to identify patterns in Years of Sales Data.
Will have Collateral if there's a Defaulted Loan
Financial Statements for Future Planning and Decision-Making is that they show a Company's Budget.
Limitation
the Lender cannot Predict Future Repayment
the Lender cannot Predict the Business still can run Efficiently in the Future.