The credit analysists seeks to identify the appropriate level of default risk associated with investing in that particular entity by conducting a credit analysis.
Analysts attempt to predict the probability that a borrower will default on its debts, and also the severity of losses in the event of default. Using financial ratios, cash flow analysis, trend analysis, and financial projections, an analyst can evaluate a firm’s ability to pay its obligations.
The outcome of the credit analysis will determine what risk rating to assign the debt issuer or borrower. The risk rating, in turn, determines whether to extend credit or loan money to the borrowing entity and if so, the amount to lend.
Credit analysts are also referred to as credit risk analysts. A credit analyst evaluates the level of risk and determines the interest rate and credit limit or loan terms for a borrower. Analysts use the research to make certain that the borrower receives an affordable loan and to help shield the lender from default.
Effective credit analysis is essential for investors seeking to determine whether a company has the financial ability to meet its financial obligations. While by no means a guarantee against default, credit analysis involving the five Cs character, capacity, capital, collateral and conditions these can help to manage default risk.
All in all, the 5 C’s of credit are a simple way for lenders to decide if you’re a reliable borrower. Each C is a different measurement of whether you’ll repay their loan or default because of mismanagement, bad economic timing, other debt obligations, or something else they can foresee. Credit analysists may include banks or bond investors.