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CREDIT AND EQUITY ANALYSIS - Coggle Diagram
CREDIT AND EQUITY ANALYSIS
3C of credit analysis
Character
refers to firm management’s professional reputation and the firm’s history of debt repayment
Collateral
reduces lender risk
Capacity
close examination of a firm’s financial statements and ratios.
Assess firm creditworthiness
Scale and diversification
Operational efficiency
Margin stability
Leverage
Screening for Potential Equity Investments
An analyst must select portfolio stocks from the large universe of potential equity investments. Accounting items and ratios can be used to identify a manageable subset of available stocks for further analysis
Criteria commonly used to screen for attractive equity investments include low P/E, P/CF or P/S; high ROE, ROA, or growth rates of sales and earnings; and low leverage.
Analysts should be aware that their equity screens will likely include and exclude many or all of the firms in particular industries
Financial Statement Adjustments to Facilitate Comparisons
Differences in the treatment of the effect of exchange rate changes
Differences in classifications of investment securities
Differences in inventory cost flow assumptions/methods
Capitalization decisions
Differences in depreciation methods and assumptions