Chapter10 - 10 CHAPTER Credit Analysis Liquidity refers to...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 10 CHAPTER Credit Analysis Liquidity refers to the companys 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 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 and Working Capital Basics Severe illiquidity often precedes Lower profitability Restricted opportunities Loss of owner control Loss of capital investment Insolvency and bankruptcy Liquidity and Working Capital Basics 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 companys 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 Classification as current asset depends on: 1. Manaments intent 2. Industry practice Analysis must assess this classification 1. Is classification as current asset appropriate? 2. If not, then adjust accounts and amounts among current and noncurrent Liquidity and Working Capital Current Assets Balance Sheet Classification as current liability depends on: 1. Manaments intent 2. Industry practice Analysis must assess this classification 1. Is classification as current liability appropriate? 2. If not, then adjust accounts and amounts among current and noncurrent 3. Are current liabilities reported? 4. If not, then adjust accounts for these amountspotential examples: Contingent liabilities associated with loan guarantees Future minimum rental payments under noncancelable operating leases Progress payments under contracts Current deferred tax liabilities (and assets) Liquidity and Working Capital Current Liabilities Working capital is defined as the excess of current assets over current liabilities Widely used measure of short-term liquidity Deficient when current liabilities exceed current assets In surplus when current assets exceed current liabilities A margin of safety for creditors A liquid reserve to meet contingencies and uncertainties A constraint for technical default in many debt agreements Liquidity and Working Capital Working Capital Working capital more relevant when related to other key variables such as Sales Total assets Working capital is of limited value as an absolute amount Liquidity and Working Capital Working Capital Current Ratio Reflects on: Current liability coverage-- assurance in covering current...
View Full Document

This note was uploaded on 08/06/2010 for the course FI575 FI575 taught by Professor Srinivasan during the Spring '08 term at Keller Graduate School of Management.

Page1 / 71

Chapter10 - 10 CHAPTER Credit Analysis Liquidity refers to...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online