This is the second installment of the How to be an effective credit analyst series. If you missed it, you may read part 1 here.
Today, we look at going beyond Financial Analysis.
Tip#2: Beyond financial analysis
An effective credit analyst knows that financial analysis is more than just about the numbers.
An analyst can extract and form an opinion from the numbers about the company and link it to the risk analysis to make a better conclusion about the company’s credit worthiness.
It’s not enough to know how to calculate the cash flow and financial ratios of a company but how to interpret these tools that is important to analysis.
In order to achieve the above, you need to keep in mind the following for your credit applications:
- You should base the analysis on as many sources as possible (this is easy to do for listed companies). If you’re analysing a non-listed company, you need to corrobrate the financial reports with discussions with management and (if possible) vendors and customers of the company.
- For listed companies, while annual reports should also be used in the analysis, it should only be used selectively and with a critical eye since directors have vested interest in presenting their company’s financials in a positive light.
- When analysing the company, you should keep in mind the ultimate purpose of the analysis: Why a credit is acceptable (or why it should be terminated in some cases)?
If you want to learn more about being an effective credit analyst and need to be trained up quickly, you’ll be interested in this Credit Analysis training course.