Credit Analysis 11 CHAPTER
11 CHAPTER Credit Analysis
Liquidity and Working Capital Basics Company Liquidity refers to the ability to meet short term obligations Liquidity is the ability to convert assets into cash or to obtain cash Short term is the longer of one-year or the company operating cycle
Company Liquidity refers to the ability to meet shortterm obligations Liquidity is the ability to convert assets into cash or to obtain cash Short term is the longer of one-year or the company operating cycle Liquidity and Working Capital Basics
Liquidity and Working Capital Basics Liquidity is a matter of degree Lack of liquidity can limit Advantages of favorable discounts Profitable opportunities Management actions Coverage of current obligations
Liquidity is a matter of degree Lack of liquidity can limit • Advantages of favorable discounts • Profitable opportunities • Management actions • Coverage of current obligations Liquidity and Working Capital Basics
Liquidity and Working Capital Basics Severe illiquidity often precedes ° Lower profitability Restricted opportunities Loss of owner control Loss of capital investment Insolvency and bankruptcy
Severe illiquidity often precedes • Lower profitability • Restricted opportunities • Loss of owner control • Loss of capital investment • Insolvency and bankruptcy Liquidity and Working Capital Basics
Liquidity and Working Capital Current Assets Current assets are cash and other assets reasonably expected to be (1) realized in cash, or(2) sold or consumed, during the longer of one year or the com pany's operating cycle Current assets include: Cash -ultimate liquid asset Cash equivalents -temporary investments of excess cash Marketable securities- debt or equity securities held as s-t investments Accounts receivable- mounts due from credit sales Inventories items held for sale in the normal course of business Prepaid expenses -advance payments for services and supplies
Current assets are cash and other assets reasonably expected to be (1) realized in cash, or (2) sold or consumed, during the longer of oneyear or the company’s operating cycle Current assets include: Cash -- ultimate liquid asset Cash equivalents -- temporary investments of excess cash Marketable securities -- debt or equity securities held as s-t investments Accounts receivable -- mounts due from credit sales Inventories -- items held for sale in the normal course of business Prepaid expenses -- advance payments for services and supplies Liquidity and Working Capital Current Assets