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

2. 10-2 10 CHAPTER Credit Analysis

3. 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?

4. 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 =

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

6. 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

7. 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 end755,2328,694- 3 Net cash flows form operating activities (163,851)(7,546)1,711 4Cash flow ratio-0.16-0.410.42 5Cash-to-maturing debt ratio-0.22-0.87N/A Liquidity analysis

8. 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)

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

10. 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 ÷

11. 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 ÷

12. 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 =

13. 10-13 Solvency analysis Capital Structure

14. 10-14

15. 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

16. 10-16

17. 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.