Credit Risk Training Specialist

Ratio Analysis

The purpose of this training program is to equip Commercial, Business, and Corporate bankers, as well as Credit Officers with the tools to more accurately analyse the financial health of companies, and how they compare to other companies within the same industry and/or geography.

Commercial lenders are operating in a very competitive environment, and being asked to do more pre-lending analysis than experienced previously, as companies take on more leverage.  Understanding ratio analysis can be a big help in this area and can help lenders to get to a decision quickly using fewer resources. 

Ratio Analysis can be critical in the provision of a theoretical data point, but the ratios need to be interpreted from a business, and a lenders standpoint. It is important that Managers and Analysts spend time in understanding the underlying factors (and trends) behind the numbers, and this will be covered during this course.

Participants will be reminded that a financial ratio is a simple mathematical comparison of two entries from a company's financial statements. They will also be reminded that Financial Ratios do not necessarily identify the timing of cash flows, which is crucial for liquidity management.

There are literally hundreds if not thousands of ratios that could be calculated using information from a customer’s Balance Sheet, Income Statement & Cash Flow Statement, but this program will focus on critical ratios relating to:-

Liquidity Measurement Ratios

Solvency/Leverage Ratios

Efficiency Ratios; and

Profitability Indicator Ratios

……and interpreting/analysing the outcomes.

The key is for bankers to select ratios that they believe are indicative of:-

A customer’s ability to pay its debts as they come due; and

The customer or applicant’s long term viability. 

Following completion of this training program, participants will be able to ascertain the likely future financial performance of a company by understanding:-

The benefit of looking at a whole array of relevant ratios to get a clearer picture of the financial health of a company, rather than attempting to interpret a single ratio.

The importance of trend analysis over a specific time period on a range of relevant (and critical) ratios, to ascertain business performance and direction.

Ratios are much more meaningful when taken alongside ratios of other companies within the same sector.

The impact of ratio outcomes/trends, prompting lenders to probe further, and to ask relevant questions of borrowers.

Many companies “window-dress’ their financial position leading up to year-end, which can distort ratios.

Ratio analysis is generally assessed on historical data, which may not correlate to the future prospects of a company, but projected trend analysis can be a good indicator.

The sensitivity of various risk factors facing companies (and industries).

How to operate in an increasingly volatile & unpredictable environment.

A company’s financial statements can run hundreds of pages, but proper ratios with trend analysis can be succinctly presented on one page. 

A solid understanding of ratio analysis can help any commercial lender become more successful, and following completion of this course, participants will be able to apply the financial ratios explained during the course to:-

Chart trends in a customer’s financial performance;

Find trends, and point to potential problem areas that require additional scrutiny.

Finance Structure/Strategy

The purpose of this training program is to introduce Commercial, Business, and Corporate lenders, as well as Credit Officers to the concepts of financial (capital) structure, leverage, liquidity, and cash flow from the strategic point of view of companies, but particularly for lenders.

This training program defines the components of capital structure, and embraces how Financial Structure plays an important role in maximizing the value of businesses, involving the appropriate and calculated use of leverage, and the maintenance of sufficient liquidity, ensuring that adequate cash is available, and plays an important role in the cost structure of a business. Financial Structure can also affect the risk of a business, and lenders need to have an appreciation of the tolerance levels, as it relates to different industries, because different companies, in different industries, apply different debt/equity ratios, and these may change as the economy goes through change.

Financial Strategy is integral to a company’s strategic plan, setting out how it plans to finance it’s overall operations, to meet its objectives into the future, providing a level of reassurance (as well as opportunities) to lenders.

Lenders are operating in a very competitive environment, and being asked to do more pre-lending analysis than experienced previously, as companies take on more leverage, and this course is focused on the relationship, and quantum of debt and equity, and the various types (and cost) of debt and equity instruments available. 

Following completion of this training program, participants will be able to:-

Understand the concepts and significance of financial structure, capital structure (incl.optimal capital structure).

Understand how a financial strategy is critical to maintain a sustainable and optimal capital structure, in order to maximize the value of a business, and ensure its longevity, and creditworthiness.

Have a better understanding of the concepts and impact of debt, equity, leverage, cash flow, and liquidity, on a company’s value and long-term success.

Consider the level and mix of capital required, both now and in the future, to implement a company’s business plan (financial strategy).

Calculate and interpret basic ratios relevant to capital structure, leverage, and liquidity.

Understand why cash flow is more important than earnings, and how this relates to financial structure (which reinforces the key principles of “Cash Flow Forecasting & Modelling”).

Understand the implications of increased leverage, and how this affects lenders and shareholders.

Understand how the weighted average cost of capital (‘WACC’) is calculated (we will share a model with the participants).

Understand the distinction between business risk and financial risk, and the relationship with leverage.

Understand the relationship between investment and financing decisions, and the appropriate use of leverage.

Understand that, generally, fixed assets are financed by long-term debt and equity, while current assets are generally financed by current liabilities (incl. short term debt), but there may be some components of working capital assets that require to be offset by long-term debt (which can distort some ratios).

Be better equipped to seek relevant answers to a range of critical issues related to financial structure, to assist lenders to undertake a more rigorous assessment of the creditworthiness of borrowers.

Company/Business Valuation Analysis

The purpose of this training program is to equip Commercial, Business, and Corporate bankers, as well as Credit Officers with the tools to more accurately analyse the value of a business which the bank may be funding (as an acquisition, or a disposal).

Company/Business Valuation is the analytical process of determining the current, or projected worth of an asset or a company, for a variety of reasons, but, as Lenders, we need to consider several issues, being:-

Purpose - “Why are we valuing this business?”

To determine – “What is this business worth”

Consequently, Company/Business Valuation requires informed judgement and sound knowledge of the business of borrowers, taking into account industry, economic, climatic, market, environmental, and political factors, and the likely impact these factors may have on future cash flows, as well as debt service, before determining the best valuation method to apply.

The purpose of this training program is to equip Commercial, Business, and Corporate bankers, as well as Credit Officers with the tools to more accurately determine an appropriate/relevant value of a company/business using asset based and revenue based methods. This program will consider many different valuation techniques, including:-

Book Value;

Market Value/Fair Market Value;

Liquidation Value (and/or break-up value);

Comparable Sales Method & Precedent Transactions (commonly used for private companies);

Replacement Value (often used by Insurance Companies);

Earnings Multiple (a simple rule of thumb method, generally linked to EBITDA);

Discounted Cash Flow (considered the most conceptually sound valuation method, and this program delves more deeply into this method, as well as undertaking several related exercises)

…and the program will also analyse how values are attributed to various intangibles, including:-

Goodwill;

Trademarks;

Intellectual Property;

Mastheads;

…while the program will also consider the most appropriate means to value a:-

Franchise; as well as a

Business with a major term contract.

The program includes much theory, as well as various exercises, to demonstrate the different approaches, and will also analyse how valuations can also be affected by (but not limited to):-

Business’s management;

Prospects of future earnings;

Key financials (incl. EBIT);

Industry dynamics/life cycle;

Composition of capital structure (we’ll also incorporate ‘Weighted Average Cost of Capital”)

Industry/company synergies;

Competitive forces;

Economic drivers;

Political/regulatory issues;

Climate issues

Whilst valuation is the analytical process of determining the current (or projected) worth of an asset or a company, Lenders need to consider a number of issues when valuing a business:-

The business's management, the composition of its capital structure, the prospect of future earnings, the market value of its assets, among other metrics

If lenders are financing a business being acquired, does it represent good value, and capable of being financed.

If an existing business/division being sold, does the sale price represent good value, and does it impact on residual business and debt service;

Is the business distressed, and are lenders looking to recover debt?

Is the business a ‘going concern’ and/or have good prospects?

Lenders need to be aware of any potential challenges the acquisition may incur in the future;

If the bank is funding an acquisition, how should it be funded, and is it capable of being integrated into an existing business.

If a customer is disposing of a business, does it represent good value from the Lender’s perspective.

Working Capital Management

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Currently being redeveloped

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