Please enable JavaScript.
Coggle requires JavaScript to display documents.
EVALUATING CREDIT QUALITY - Coggle Diagram
EVALUATING CREDIT QUALITY
Profits and
Cash Flows
Funds from operations (FFO)
are net income from continuing operations plus depreciation, amortization, deferred taxes, and noncash items
Earnings before interest, taxes, depreciation, and amortization (EBITDA)
is a commonly used measure that is calculated as operating income plus depreciation and amortization
Free cash low before dividends
is net income plus depreciation and amortization minus capital expenditures minus increase in working capital
Free cash low after dividends
is free cash low before dividends minus the dividends. If free cash low after dividends is greater than zero, it represents cash that could pay down debt or accumulate on the balance sheet
Leverage Ratios
Debt/capital
is the percentage of the capital structure inanced by debt. A lower ratio indicates less credit risk
Debt/EBITDA
is more volatile for firms in cyclical industries or with high operating leverage because of their high variability of EBITDA
FFO/debt
divides a cash low 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
Coverage Ratios
EBITDA/interest expense
is used more often than the EBIT-to-interest expense ratio. Because depreciation and amortization are still included as part of the cash low measure, this ratio will be higher than the EBIT version
EBIT/interest expense
is the more conservative measure because depreciation and amortization are subtracted from earnings
Yield spreads on corporate bonds
Credit cycle
Economic condition
Broker-dealer capital
General market demand and supply
Issuer’s financial performance
High Yield Debt
Unproven operating history
High leverage
Low or negative free cash low
High sensitivity to business cycles
Low confidence in management
Unclear competitive advantages
Large off-balance-sheet liabilities
Industry in decline
Liquidity
Balance sheet cash
Working capital
Operating cash low (CFO)
Bank credit
Sales of assets
Equity issued
Sovereign Debt
Institutional assessment:
includes successful policymaking, minimal corruption, checks and balances among institutions, and a culture of honoring debts
Economic assessment:
includes growth trends, income per capita, and diversity of sources for economic growth
External assessment:
includes the country’s foreign reserves, its external debt, and the status of its currency in international markets
Fiscal assessment:
includes the government’s willingness and ability to increase revenue or cut expenditures to ensure debt service, as well as trends in debt as a percentage of GDP
Monetary assessment:
includes the ability to use monetary policy for domestic economic objectives (this might be lacking with exchange rate targeting or membership in a monetary union) and the credibility and effectiveness of monetary policy