Lecture 20 - Credit Risk Analysis Ratios & Information

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EXAM - Student will be given a basic balance sheet and income statement and will have to calculate the ratios in problem 17-3; or be able to do determine if an item is a source or use similar to problem 17-4. Print solutions and bring to class. The answers to the 9th edition are at RatiosCh17_9thed.doc and additional problems at RatioSampleProblems.doc.  The solutions to problems 3 and 4 in the 8th ed. are also below at ratio17S11.doc. 

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DO NOT PRINT BUT THE FOLLOWING LINK PROVIDES A MORE DETAILED ANALYSIS (17 pages) OF THE RATIOS AND FINANCIAL STATEMENTS WHICH WE WILL DISCUSS IN CLASS: The ratios that will be used on the exam are provided on pages 7-11 and the sources and uses statement is provided on page 15 or 16. 

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Credit reports provide important information that should be used in interpreting financial ratios.  DO NOT PRINT but we will review some of this information at the Experian site Understanding business credit at  http://www.experian.com/small-business/understanding-business-credit.jsp.  We will examine understanding the score, data on file, and low score.

We will also examine a sample business report at http://sbcr.experian.com/pdp.aspx?pg=Sample-BCAI&hdr=report.

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When using earnings one should recognized that there may be a huge difference between GAAP profit, i.e., net income after taxes that takes into account all expenses and revenues, and operating profits that try to explain profits related to the core business but may include or exclude many items depending on who is determining profit.  See the article below for examples of differences on profits that are reported by different sources.

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OPTIONAL NOT ON EXAM:

We will not cover this information in class but for information on small business credit and management go to https://www.sba.gov/category/navigation-structure/starting-managing-business.  

We will not cover the following material in class but for an excellent recent discussion of industry risk analysis see 20 Questions: Getting to an Informed Assessment of Industry Risk, QuickReadBuzz.com, Nov. 21, 2012, at the link below.  

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Credit Reports: What Small Businesses Don't Know Can Hurt, WSJ.com, June 21 2013 at SmallBusCreditReports062113.doc.

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The following article demonstrates local information in a smaller town may lead to better credit risk information as illustrated by lower SBA loan default rates.

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