10. Credit Ratios

What’s in this chapter:

• Why and how ratios are used

• How to construct and use common liquidity ratios

• How to use and construct leverage ratios

• Relating leverage ratios to asset value

• Free cash flow ratios as another measure of liquidity

This chapter deals with various types of credit ratio analysis. These are the most common ratios used to assess the credit quality of a leveraged loan/bond. This chapter focuses on ratios that give you a better understanding of the trends in a company’s finances and help you figure out the relative merits of different securities and credits.

Complaints about ratio analysis include that it can be too simple, that it gives you only a partial idea of a company’s credit profile for one time ...

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