Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Financial Statement Analysis K R Subramanyam John J Wild

CHAPTER Credit Analysis

10-3 Credit analysis Liquidity A company’s ability to meet short-term obligations. –Are the company’s current assets adequate to its current liabilities? –How long is the company’s operating cycle? –How much of cash does the company generate from operations? Solvency A company’s ability to meet long-term obligations. –What is the company’s capital structure? –Is the company able to pay borrowings’ interests and principals when come due?

10-4 Liquidity analysis Current ratio Current assets Current liabilities = Working capital Current assets – Current liabilities = Quick ratio Cash & Cash equivalents + Marketable securities + Accounts receivable Current liabilities = Cash-to-current liabilities ratio Cash & cash equivalents + marketable securities Current liabilities = Cash-to-current assets ratio Cash & cash equivalents + marketable securities Current assets =

10-5 As at 31/12/2011VCSDACHPS 1Current ratio0,911,194,06 2Quick ratio0,190,603,04 Example 1

10-6 Liquidity analysis Cash flow ratio Operating cash flow Current liabilities = Cash-to-maturing debt ratio Operating cash flow Maturing debts = CASH GENERATION ANALYSIS

10-7 For the year ended Dec. 31, 2011VCSDACHPS (in VND mil.) 1Current liabilities at year end1,047,89218,5234,102 2Maturing debts at year end755,2328, Net cash flows form operating activities (163,851)(7,546)1,711 4Cash flow ratio Cash-to-maturing debt ratio N/A Liquidity analysis

10-8 Liquidity analysis Purchasing Payments for purchasing Selling Collecting money from selling Payment period Days to sell inventory Collection period Operating cycle (cash cycle or net trade cycle)

10-9 Operating cycle = Days to sell inventory Collection period + Payment period - Liquidity analysis

10-10 Days to sell inventory 360 Cost of goods sold = Liquidity analysis Average inventory ÷ Collection period 360 Sales = Average account receivables ÷ Payment period 360 Cost of goods sold = Average account payables ÷

10-11 Days to sell inventory 360 Cost of goods sold = Liquidity analysis Average inventory ÷ Collection period 360 Sales = Average account receivables ÷ Payment period 360 Cost of goods sold = Average account payables ÷

10-12 Inventory turnover Cost of goods sold Average inventory = Liquidity analysis Accounts receivable turnover Sales Average accounts receivable = Accounts payable turnover Cost of goods sold Average accounts payable =

10-13 Solvency analysis Capital Structure

10-14

10-15 Total debt-to-equity capital ratio Total liabilities Shareholders’ equity = Total debt ratio (total debt-to- total capital ratio) Total liabilities Total capital = Debt-to-equity ratio (Long-term debt to equity capital ratio) Long-term debt Shareholders’ equity = Solvency analysis

10-16

10-17 Time interest earned ratio EBIT Interest expense = Solvency analysis Earnings to fixed charges ratio Earnings available for fixed charges Fixed charges = Earnings available for fixed charges: Pretax income from continuing operations Interest incurred (both expensed and capitalized) Interest portion of operating rental expenses.