Credit Analysis & Underwriting Series: Analyzing Financial Statements for the Credit Analyst

Analyzing financial statements goes beyond EBITDA. Proper analysis focuses on determining a borrower’s financial risk and assessing operating performance and cash flow, debt repayment ability, liquidity, leverage, and profitability. The task is to determine the operating entity’s ability to generate sufficient cash for:

1. On-going operations
2. Paying interest payments, current portion of long-term debt (CPLTD), and shareholder dividends
3. Capital spending on plant, equipment, and other fixed assets

If the operating entity does not generate sufficient cash from operations, it would have a financing requirement. The credit analyst needs to understand what outside sources the operating entity used to get cash and how much cash was obtained from each source. This presentation will address the evaluation of financial risk through the analysis of the borrower’s financial statements.

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