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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.
How does "Capital" differ from "Capacity" in credit analysis?
Capital is about overall financial strength, while Capacity focuses on the ability to repay financing.
What are the main components of a business’s capital?
Cash, investments, property, equipment, and financial structure.
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.
What is working capital?
It is the difference between a company’s current assets and current liabilities.
What does the quality of working capital refer to?
It assesses the reliability and efficiency of accounts receivable, accounts payable, and inventory management.
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.
What are signs of strong working capital management?
Timely collection of receivables, efficient inventory turnover, and well-managed payables.
What does increasing leverage indicate?
That the company may be relying more heavily on debt, which could increase financial risk.
Why should a company’s leverage be compared to industry averages?
To evaluate whether its debt levels are reasonable and competitive within its sector.
What does high equity investment by owners usually indicate?
Strong commitment and motivation to manage the business effectively and cooperate with lenders.
What should analysts review about a company’s interest-bearing debt?
Amount, purpose, payment terms, and maturity dates.
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.
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.
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.
How is Funded Debt to EBITDA calculated and interpreted?
Interest-Bearing Debt / EBITDA — lower values suggest stronger ability to cover debt from earnings.
What does the Funded Debt to Equity ratio indicate?
The proportion of long-term debt compared to equity; lower values indicate less financial risk.
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.
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
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.
How is equity raising potential assessed for a public company?
By reviewing its recent success and market conditions for raising equity capital.
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.
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.
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.
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.