Question

Financial Analysis:

Discussion Question 1:

Ratio analysis involves calculations that use the data from the financial statements to evaluate the performance of companies in different key areas. How would this information be used by a credit analyst as compared to someone is going to make an investment decision?

Answer 1

Hello

Credit Analysts and Investors look onto financial statements with a completely different motive.

The main aim of investor is to earn a return on his investment and as this return is dependent on the future expected benefits from investment. Hence, an investor will scrutnize the projects undertaken and the ability of the company to generate profit with a steady growth rate. Investor is primarily interested in the profits of the company, which is an appropriation, hence, he'll be interested in ratios which determine the profit earning capacity like Net Profit Ratio, Return on Equity, Return on Total Assets etc.

However, a credit analyst care little about profits. As the credit analysts analyse the debt servicing and paying capacity of the company and interest is a charge on profits of the company, not an appropriation, they have a little relation with the profits. Hence, credit analysts are interested in whether the investor has adequate cash flow to service the debt and repay the debt by comparing ratios with industry standards, benchmark data, other borrowers and historical trends. Credit Analyst will be interested in ratios like Interest Coverage Ratio, Current Ratio etc.

I hope you this clears your query.

Do give a thumbs up if you find this helpful.