Types of analysis credit-finance

Types of Analysis

Main types of analysis

Credit (Risk): This is the type of analysis that I do for a living. It is very comprehensive and it involves at a minimum five of the sub-types listed below (usually common size, percent change, trend, cash flow and comparative). The credit analysis is performed because interest income and loan fees are the main source of revenue for commercial banks. Therefore, it is vital to asses the financial condition of prospective borrowers and consider non-financial factors that might impact the ability to repay the loans.

Financial: Not much differentiation between credit analysis and financial analysis. However the main difference is that while a credit analysis is usually tied to a specific monetary request, the financial analysis is not related to any money disbursement. In fact, the analyst sometimes does not even have to give a recommendation or opinion.

Specialized analysis (could be considered sub-categories)

Common Size: Looks at balance sheet items as a percentage of total assets.

Margin: Looks at income statement items as a percentage of net sales

Percent changes: Looks at dollar changes as a percentage and looks at these changes as they relate to the prior accounting period.

Comparative: Contrasts data from prospective borrower to similar peer or industry data. The data can either be internally compiled if the bank has enough borrowers in the industry to pull an adequate sample or it can be obtained from outside sources .

Ratios: Looks at the relationship between two or more related numbers. Take a look at my Financial Ratios page for more information.

Cash Flow: Looks at the repayment capability of the borrower to repay the proposed loan. More information about this in the Traditional Cash flow page and the UCA cash flow page.

Pro Forma: Looks at projected/forecasted results.

Valuation: An analysis looking for the value of a business. Take a look at my Valuation page for more information.

Rate of return: Mostly used by management to determine the profitability of a project and determine if it meets the IRR (Internal Rate of Return) or ROI (Return On Investment).

Note that my definitions are slanted due to my point of view as a credit analyst. A Wall Street security analyst might give you a whole different description of financial analysis.


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