Financial Risk Analysis
After evaluating the issuer’s competitive position and operating environment, the analysts proceed to analyse the financial strength of the issuer. Financial risk is analysed largely through quantitative means, particularly by using financial ratios. While the past financial performance of the issuer is important, emphasis is placed on the ability of the issuer to maintain improve its future financial performance.
As ratings on audited data to be rating process does not entail auditing a company’s financial records, the analysis of the audited financial results begin with a review of accounting quality. The purpose is to determine whether ratios and statistics derived from financial structure can be used to accurately measure a company’s performance and its position, relative to both is per group and that, larger universe of companies.
Emphasis is also laid on an analysis of cash flow patterns, as it provides a better indicator of the issuer’s debt servicing capability compared to reported earnings. A cash flow analysis reveals the usage of cash for different purposes, and, consequently, the extent of cash available for the service.
The future debt claims on the issuer’s as well as the issuer’s ability to raise capital is also assessed in order to arrive at the level of the issuer’s financial flexibility. The areas considered a financial analysis include: