Overview
Analysts are often asked to perform a credit assessment of a given company, often in order to value its debt, or to make an assessment of whether to extend credit to the firm in question and at what price.
Assessments
Analyst credit reports typically analyze a firms credit portfolio along a set of factors. Common factors are give below.
- Cash Flow and Liquidity - the cash flow and volatility of cash flows are compared to the amount of liquidity that the firm has on the books.
- Industry - a company's risk is often tied to the industry it is in. Some industries are naturally more volatile than others. (think Utilities versus the Airlines)
- Profitability and Risk - profitable firms are less of a credit risk than non-profitable ones. Stability of earnings is also a consideration
- Capital Structure - how leveraged a firm is will affect its credit worthiness. Highly leveraged firms have higher credit risk. (see capital structure)