Credit Analysis – Cash Flow Analysis

Summaries

Definitions:

Net Income

+ Depreciation

-/+ other non-cash item

=> Funds from operations

+ decrease in the non-cash current asset

+ increase in the non-cash liability

=> Operating Cash Flow

- capital expenditures

=> Free Operating Cash Flow (FOCF)

- Cash Dividend

=> Discretionary Cash Flow

- acquisition

+asset disposals

=>Prefinancing Cash Flow

Ratios commonly used to evaluate Debts (e.g. by S&P):

1. Fund from operations/ Total Debts
2. Fund from operations/ Capital spending requirements
3. Free Operating Cash Flow + I / I
4. debt service coverage = (FOCF + I )/ (I + annual principal repayment)
5. debt payback period = total debt / discretionary cash flow

Questions

1. When to use Fund from operations related ratios?

Use fund from operations related ratios when analyze strong issuers and use discretionary cash flow for issuers with lower credit.