Statement Analysis

1. Differentiate between Credit Analysis and Equity Analysis. Be sure that your answer mentions the following terms:   Liquidity, Solvency, Technical Analysis, Fundamental Analysis, Intrinsic Value
- Credit analysis is the evaluation of the creditworthiness of a company. Creditworthiness is the ability of a company to honor its credit obligations. Creditors lend funds to a company in return for a promise of repayment with interest. Creditors lend funds in many forms and for a variety of purposes. Credit analysis focuses on downside risk instead of upside potential. This includes analysis of both liquidity and solvency. Liquidity is a company’s ability to raise cash in the short term to meet its obligations. Solvency is a company’s long run viability and ability to pay long-term obligations. Equity analysis is symmetric in that it must assess both downside risks and upside potential. Equity investors provide funds to a company in return for the risks and rewards of ownership. Equity investors are the first to absorb losses when a company liquidates, although their losses are usually limited to the amount invested. When a company prospers, equity investors share in the gains with unlimited upside potential. Individuals who apply active investment strategies primarily use technical analysis, fundamental analysis, or a combination. Technical analysis or charting, searches for patterns in the price or volume history of a stock to predict future price movements. Fundamental analysis, which is more widely accepted and applied, is the process of determining the value of a company by analyzing and interpreting key factors for the economy, the industry, and the company. A major goal of fundamental analysis is to determine intrinsic value which is the value of a company determined through fundamental analysis without reference to its market value.

2. What types of information would go into the Business Environment and Strategy Analysis portion of the business analysis?... [continues]

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