CFA Level I · CFA Level I Exam · Introduction to Financial Statement Analysis
A credit analyst is deciding whether to extend a loan to a company. Compared with an equity analyst, the credit analyst is most likely to place greater emphasis on:
A credit analyst most likely emphasizes the company's ability to generate cash flow to meet its debt obligations. Lenders receive fixed payments and gain little from upside, so repayment capacity and downside risk matter more than growth potential or share price appreciation, which concern equity investors.
- Athe company's ability to generate cash flow to meet debt obligationsCorrect
- Bthe potential for upside growth in the company's earnings
- Cthe company's expected share price appreciation
Explanation
Creditors receive fixed contractual payments and have limited upside, so they focus on downside risk and the ability to service debt from cash flow. Earnings growth and share price appreciation matter mainly to equity holders.
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