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

Earnings Before Interest, Taxes, Depreciation, and Amortization. A measure of cash flow from operations.

Used to measure cash flow for debt servicing in leveraged finance credit analysis

Cash flow available after all business expenses and investments.

The total amount of money a company owes to its lenders.

The expenses associated with repaying debt obligations, such as interest payments.

The ability of a company to meet its short-term financial obligations.

Annual financial filing for publicly traded companies.

Quarterly financial filing for publicly traded companies.

EBITDA plus noncash items like stock compensation, noncash charges, or asset write-downs.

A financial statement that shows how cash is generated and used in a company's operations, investing, and financing activities.

The cash flow generated from a company's core business operations.

Non-cash expenses reflecting the decline in value of assets over time.

Non-cash expense when a company compensates employees with stock instead of cash.

A reduction in the book value of an asset due to impairment or obsolescence.

The amount a company invests in long-term assets, such as buildings or machinery.

Capital Expenditures are shown in the Investing Activities section of the Statement of Cash Flows.

The accounting expense that reflects the decline in value of a long-term asset over time.

Depreciation is a non-cash expense, meaning it doesn't actually involve spending money. It is subtracted from income to calculate net income, but it does not impact the cash flow.

Analysts often adjust for depreciation when analyzing a company's cash flow, because it doesn't reflect actual cash spent.

A measure of a company's free cash flow after deducting capital expenditures, but before accounting for debt financing

Section on the Statement of Cash Flows that shows the cash flows related to the purchase and sale of long-term assets.

A common method of depreciation where the cost of an asset is evenly spread over its useful life.