The 5C's of Credit - CAPITAL

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25 Terms

1
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What does the "Capital" component of the 5 C’s of credit refer to?

It refers to the overall financial strength and wealth of the borrower.

2
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How does "Capital" differ from "Capacity" in credit analysis?

Capital is about overall financial strength, while Capacity focuses on the ability to repay financing.

3
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What are the main components of a business’s capital?

Cash, investments, property, equipment, and financial structure.

4
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What three areas should a credit analyst focus on when reviewing a company's capital?

Working capital, leverage, and other sources of capital or funding.

5
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What is working capital?

It is the difference between a company’s current assets and current liabilities.

6
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What does the quality of working capital refer to?

It assesses the reliability and efficiency of accounts receivable, accounts payable, and inventory management.

7
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Why is the quality of working capital important in assessing Capital?

Because it affects liquidity and the company’s ability to respond to financial stress.

8
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What are signs of strong working capital management?

Timely collection of receivables, efficient inventory turnover, and well-managed payables.

9
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What does increasing leverage indicate?

That the company may be relying more heavily on debt, which could increase financial risk.

10
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Why should a company’s leverage be compared to industry averages?

To evaluate whether its debt levels are reasonable and competitive within its sector.

11
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What does high equity investment by owners usually indicate?

Strong commitment and motivation to manage the business effectively and cooperate with lenders.

12
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What should analysts review about a company’s interest-bearing debt?

Amount, purpose, payment terms, and maturity dates.

13
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What is the Debt to Equity Ratio, and how is it calculated?

Total Liabilities / Shareholder’s Equity — it measures how much financing comes from debt vs equity.

14
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What is the Debt to Assets Ratio, and what does it measure?

Total Liabilities / Total Assets — it measures the portion of assets financed by debt.

15
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What is considered preferable in both Debt to Equity and Debt to Assets ratios?

A lower ratio, indicating stronger solvency and less reliance on debt.

16
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How is Funded Debt to EBITDA calculated and interpreted?

Interest-Bearing Debt / EBITDA — lower values suggest stronger ability to cover debt from earnings.

17
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What does the Funded Debt to Equity ratio indicate?

The proportion of long-term debt compared to equity; lower values indicate less financial risk.

18
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What are underutilised debt facilities and why are they important?

Lines of credit or loan capacity not yet drawn upon — they provide funding flexibility for future needs.

19
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What are redundant assets and how can they impact Capital?

Non-essential assets that could be sold to generate cash, improving liquidity and reducing debt needs

20
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Why is the ability to raise new equity important for a company’s Capital position?

It shows the company can strengthen its financial base and reduce dependence on debt.

21
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How is equity raising potential assessed for a public company?

By reviewing its recent success and market conditions for raising equity capital.

22
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What factors influence a private company’s ability to raise equity?

The willingness and ability of owners or investors to inject more capital into the business.

23
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What should be evaluated when assessing a company's ability to raise new debt?

Its track record, capacity, and whether existing lenders are willing to increase exposure.

24
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Why is leverage a critical factor in assessing Capital?

It determines how much of the company’s operations are financed through debt, impacting financial stability.

25
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In what way does Capital contribute to creditworthiness from a lender’s perspective?

It provides a buffer against losses and reflects the borrower’s ability to withstand financial downturns.