About Lesson
LOS C requires us to:
describe the role of financial statement analysis in assessing the credit quality of a potential debt investment
The quality of credit can be assessed by assessing the four C’s of the company. They are:
a. Character. It represents the quality of management, the professionalism in their approach, the past records, etc.
b. Capacity. This represents the company’s ability to repay. This can be measured using the solvency and liquidity ratios of the company.
c. Collaterals. These are the assets pledged against the debt.
d. Covenants. These are the restrictions or limitations on the borrower for the security of lenders.