1. RED FLAGS
3. RATIO ANALYSIS
4. ACCOUNTING PERIOD
5. DU PONT ANAYSIS
6. DEFERRED TAX
7. CREDIT RATING
8. IMPORTANT KEY RATIOS
9. CURRENCY CONVETIBILITY
10. CURRENT ACCOUNT CONVERTIBILITY
11. CAPITAL ACCOUNT CONVERTIBILITY
12. WORKING CAPITALTONDON COMMITTEE
2. RED FLAGS
Red Flags analysis comprises credit,
SEBI has introduced RED FLAGS
Red Flags are identified into 4
1. Business & Management
2. Corporate governance risk
3. Accounting risk
4. Financial risk
3. Business & management risk:
• Promoters & key mngt. Their
personal track records
• Aggressive growth policy
• Complicated business structure
• High customer concentration
•Quality of CF generation/earning ratio
•Difference in w.c
•Large amt of cash lying idle.
•Sales generation on capital employed
•Change in cash sales
•Intangible asset as part of total asset.
Corporate governance Risk:
•Concentration of promoters holding
•Quality of board & their independence
•T/O of senior mngt.
•Mngt. Compensation package
4. Risk Methodology for Mfg co.
Credit analysis of an entity begins with a review of the Economy/Industry in
which the entity operates along with an assessment of the business risk factors
specific to the entity.
1. Economy & Industry Risk:
The economic/industry environment is assessed to determine the degree of
operating risk faced by the entity in a given business.
(key ingredients of industry risk.)
Investment plans of the major players in the industry,
changes in technology,
international/domestic competitive factors in the industry,
business cycles etc
5. 2. Business Risk Analysis:
Few parameters involved in assessing business risk:
• Seasonality & cyclicality
• Cost structure
• Market share
3. Financial Risk Analysis:
Financial risk analysis involves evaluation of past and expected future
financial performance with emphasis on assessment of adequacy of cash
flows towards debt servicing.
•Validations of projects & sensitivity analysis
4. Management Evaluations.
6. Project Risk
It is any factor that may potentially interfere with
successful completion of the project.
It is not an problem but recognition that a problem
3. Backward/Forward integration
7. Leverage Buyouts
In LBO the acquirer anticipates that loans can be
quickly repaid through the disposal of non-core
assets that the target holds.
Carry out the sale of non core asset or value is lower then previous
Considering the country’s regulatory, social & law and other
situations which can be unfavorable.
Risk evaluation & Fundamentals of
credit risk assessment
Risk assessment broadly involves two
10. Ratio Analysis
It is an Quantitative Tool use to
interpret the Financial statement in
terms of operating performance &
Financial position of the firm.
• Efficiency ratio
• Profitability ratio
• Liquidity ratio
• Leveraged ratio
11. VALUATION RATIO:
•Price to book ratio
•Price to sales ratio
•Enterprise value (EBITDA )
•Price to cash ratio
Ratio from credit point of view:
•Interest coverage ratio
•Debt service coverage ratio
•Overall gearing ratio
14. Important Key Ratios
-Banking point of view..
Net Interest Income
Net Interest margin
Capital Gearing Ratio
Tier 1 CAR
Net NPA to Tangible net worth
Cost to Income Ratio
Yield on Advances
Cost of Deposit
•Asset T/O Ratio
•Return on capital employed
•Inventory T/O Ratio
15. Credit Rating
C.R are independent opinion about relative
C.R are not investment advise or buy hold
or sell recommendations.
Long term Short Term
17. Sovereign Rating
Assessment of sovereign creditworthiness i.e.
sovereign’s capacity & willingness to honor its
exiting & prospective debt obligation in timely
Rating is evaluated on the basis of
score arrived on parameters below: Political
18. Currency Convertibility
Freedom to convert domestic currency into
international expected currency & v/v.
Current account convertibility
Freedom in respect of payment & transfer for
current international transfer
20. WORKING CAPITAL
1. w.c cycle = (CA-CL)*365 / net revenue
2. Net w.c = (CA – excess cash) – CL
Methods of w.c :
1. Operating cycle = debtors + stock - creditors
2. Cash conv. Cycle = cash + cash + cash
inventory receivables payables
21. Drawing power
Drawing Power is the amount of Working Capital funds the
borrower is allowed to draw from the Working Capital limit
allotted to him.
Concept of drawing power is generally applicable on CC
It is calculated by considering the total value of paid stock
(Paid stock=Stock fewer Creditors) + book debts (not more
than 90 days old) & deducting margin from the same
22. An committee appointed by RBI for advising
to FIX MPBF for borrower.
Developed in 1975
Recommended 3 methods.
1. Borrower’s to buy 25% of net w.c
2. Borrower’s to buy 25% of c.a
3. Borrower’s to buy 25% of core c.a
23. In 1993, committee recommended
fixation of credit limits of small entities
on the basis of projected turnover i.e.
w.c limits up to 25% of projected