Credit Analysis Credit worthiness: Ability to honor credit obligations (downside risk) Liquidity Solvency Ability to meet short- Ability to meet long term obligations term obligations Focus Focus Current Financial Long-term financial conditions conditions Current cash flows Long-term cash flows Liquidity of assets Extended profitability
Credit Analysis Liquidity Ability to meet shortterm obligations Focus: • Current Financial conditions • Current cash flows • Liquidity of assets Solvency Ability to meet longterm obligations Focus: • Long-term financial conditions • Long-term cash flows • Extended profitability Credit worthiness: Ability to honor credit obligations (downside risk)
Credit Analysis Debt Characteristics Seniority -order claims are paid Collateral -asset earmarked for claims Covenants constraints on debtholders to protect creditors Other provisions -sinking fund requirements, etc
Credit Analysis • Seniority - order claims are paid • Collateral - asset earmarked for claims • Covenants - constraints on debtholders to protect creditors • Other provisions - sinking fund requirements, etc. Debt Characteristics
Credit Analysis Passive Investing Active Investing (beta strategies) (alpha strategies Aim. Aim: Diversification based Beat the market on risk propensity earn above normal investment horizon stock returns Examples: Technical Example: Indexing analysis Fundamental analysIs
Credit Analysis Passive Investing (beta strategies) Aim: • Diversification based on risk propensity & investment horizon Example: Indexing Active Investing (alpha strategies) Aim: • Beat the market -- earn above normal stock returns Examples: Technical analysis & Fundamental analysis
Intrinsic alue (or Fundamental Value) Value of Company(or stock) without reference to market value(or stock price) S Intrinsic value Market value- Buy o Intrinsic value Market value Sell a‖ Intrinsic value= Market value→Hold
Intrinsic Value (or Fundamental Value) Intrinsic value > Market value Buy Intrinsic value < Market value Sell Intrinsic value = Market value Hold Value of Company (or stock) without reference to market value (or stock price) Strategy
Business nvironment Strategy Analysis Industry Strategy Analysis Analysis Financial Analysis Analysis Accounting of Sources Prospective Analysis &Uses of Risk Analysis profitability Funds Analysis Analysis Cost of Capital Estimate (Intrinsic Value
Prospective Analysis Accounting Analysis Business Environment & Strategy Analysis Industry Analysis Strategy Analysis Financial Analysis Analysis of Sources &Uses of Funds Profitability Analysis Risk Analysis Cost of Capital Estimate Intrinsic Value