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A Closer Look At Industrials Ratings Methodology: Cash Flow Adequacy Nov 06
Standard & Poors, Nov 2006
Abstract
Cash flow analysis is the single most critical aspect of credit rating decisions. An enterprise's capacity to pay debts or any other obligation, the core underlying concept of a credit rating, is determined by the ability to generate cash--not earnings, which is an accounting concept. The income statement reflects the accrual concept of earnings (i.e., the recognition of revenues and expenses as products are sold or consumed, or when services are rendered or obtained), and not as cash is effectively received or disbursed. Depending on the accounting method used by an enterprise to report its activities, or even on the choices it makes within a single accounting method, the resulting income statement and balance sheet could be very different. The...
Companies mentioned in this report are: Brasil Telecom S.A.,Braskem S.A.,Telemar Norte Leste S.A.
Standard and Poors RatingsXpress Credit Research provides in-depth coverage of international corporates, financial institutions, insurance companies, utilities, sovereigns and structured finance programs. RatingsXpress Credit Research lets users determine the credit rating of holdings and identify key factors underlying an issuer's creditworthiness, distinguishes the different risk exposures for new and existing deals, and provides an understanding of how their analysts interpret key regulatory, political and environmental events and their economic impact.
Research Type: Commentary
Criteria articles describe the thought process and methodology Standard & Poor's analysts use in determining ratings. These commentary pieces discuss both the quantitative (economic and financial) and qualitative (business analysis and caliber of management) aspects of the analysis, as well as legal issues.
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