Credit Analysis Key Concepts

Key measures of cash flow, amount of debt obligations, cost to service debt obligations, and other sources of liquidity.

EBITDA is significant as it measures cash flow from operations available to service interest expense and other obligations.

EBITDA includes earnings before interest, taxes, depreciation, and amortization, while EBIT excludes depreciation and amortization.

<p>Higher interest rates increase the cost of servicing debt, potentially leading to higher leverage ratios and financial strain.</p> Signup and view all the answers

<p>Debt incurrence tests are covenants that allow a company to incur additional debt only if it meets certain financial criteria.</p> Signup and view all the answers

<p>The fixed charge coverage ratio is a measure of a company's ability to cover fixed charges, such as debt payments, with its earnings.</p> Signup and view all the answers

<p>Adjustments may include adding back non-recurring expenses or normalizing for changes in revenue streams.</p> Signup and view all the answers

<p>Adjusted EBITDA provides a clearer view of ongoing operational performance by excluding one-time items and anomalies.</p> Signup and view all the answers

<p>You add back taxes, interest expense, depreciation, and amortization to the net income.</p> Signup and view all the answers

<p>Adjusted EBITDA adds back other noncash items like stock compensation to provide a more accurate financial picture.</p> Signup and view all the answers

<p>OIBDA stands for Operating Income Before Depreciation and Amortization and focuses on operating income, excluding interest and taxes.</p> Signup and view all the answers

<p>The statement of cash flows provides depreciation and amortization details, allowing them to be added to net income to calculate EBITDA.</p> Signup and view all the answers

<p>Footnotes clarify which items have been added back to EBITDA, preventing misunderstandings.</p> Signup and view all the answers

<p>Fixed charge coverage ratios are useful when assessing a company's ability to meet fixed financing expenses, especially during economic downturns.</p> Signup and view all the answers

<p>Higher interest rates increase debt service costs, potentially leading to increased leverage and financial strain on the company.</p> Signup and view all the answers

<p>Ambiguously defined covenants can lead to disputes over compliance and misinterpretations of financial health.</p> Signup and view all the answers

<p>Adjusting EBITDA helps achieve a more realistic operating figure by excluding non-recurring or non-operational items.</p> Signup and view all the answers

<p>Capital expenditures are long-term investments that do not appear on the income statement but are recorded as assets on the balance sheet.</p> Signup and view all the answers

<p>The Fixed Charge Coverage Ratio measures a company's ability to cover fixed charges, such as debt payments and lease obligations, with its operating income.</p> Signup and view all the answers

<p>Higher interest rates increase the cost of debt, which can lead to higher leverage ratios if a company continues to borrow.</p> Signup and view all the answers

<p>Unleveraged free cash flow is a measure that removes capital expenditures from adjusted EBITDA to assess cash available for distribution.</p> Signup and view all the answers

<p>Depreciation is a non-cash expense that reflects the gradual decline in the value of a capital asset, rather than an actual cash outflow.</p> Signup and view all the answers

<p>If depreciation does not align with replacement costs, a company may underestimate its future investment needs or face unexpected cash requirements.</p> Signup and view all the answers

<p>Rapidly evolving technology can lead to shortened asset life spans and increased capital expenditures as companies must invest in newer, more efficient technologies.</p> Signup and view all the answers