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8FinancialRisksThereareseveralinstanceswherebusinessesfailnotbecauseoflackofbusinessopportunities,butduetopoororimpropermanagementoffinancialaffairs.Financialriskreferstot
2、hechancesofcollapseofabusinessduetowrongfinancingpolices/decisions/strategiessuchaslopsidedcapitalstructure,asset-liabilitymismatch,etc.Financialriskscanplungeasuccessfulbusinessintobankruptcy,ifnotmanagedproperly.Hence,itisvitalforacreditdecisiontobeprecededbyanin-depthfina
3、ncialanalysisofthecustomer.Financialanalysisservesmainlythreepurposes:1.Itdigsdeepandbringsoutthefinancialrisks.2.Ittriggersquestionsthatleadtoameaningfuloperating/businessanalysis.3.Thirdly,especiallyforfinancialintermediaries,suchasbanks,itisalsousefultodeterminetheextento
4、ffinancialsupportneededbytheprospectiveborrower.Thisexplainswhyfinancialdetailsaregivenprominence,amongtheinformationcalledforbycreditproviders.Financialanalysisisdonebasedonfinancialstatements.Creditriskduediligencereliesonfinancialstatementsforfinancialanalysiswhichoughtto
5、haveacashfloworientedapproach.Itfocusesonthecriticalfactorsthataffecttheobligors’historicaloperatingresultsandcashflowsinanattempttoestablishtheobligors’abilitytogeneratesustainablerecurringearningsandcashflowswhileensuringqualityofassets.8.1IMPORTANCEOFFINANCIALSTATEMENTSPe
6、terBernstein,inhisacclaimedbookAgainsttheGods–TheRemarkableStoryhasstatedthatbutfornumericalskills,mankindwouldhaveneverattainedthetechnologicalmarvelsitisnowproudof.Buildinghugebridgesorsendingmanintospacewouldhaveremainedadream,withoutthenumbers.Ifwecouldnotquantify,measur
7、eorvalue,wewouldnotbeabletoleadournormallivesinthe21stcentury.Thisisapplicabletocreditriskanalysisaswell,wherenumbersplayanimportantrole.Creditriskanalysisisbasicallyanartandasciencetodetermineprobabilities.1Analyzingvariousparameterssuchassalesgrowth,profitability,adequacyo
8、fcashflows,operatingleverage,financialleverage,totalleverage,breakevenpoint
