A credit rating agency uses “scale and diversification” as one of its metrics to assess credit risk. Which of the following would most likely be included in that category?
- Purchasing power with suppliers
- Cost structure
- Operating cash flow less dividends
Solution
A is correct. Borrowers can better withstand adverse events when they have more purchasing power with suppliers. Purchasing power reflects the organization’s scale.
B is incorrect. This measure would be of interest to credit analysts, but as an indication of operational efficiency rather than scale and diversification.
C is incorrect. This measure would be of interest to credit analysts, but as an indication of tolerance for leverage rather than scale and diversification.
Applications of Financial Statement Analysis Learning Outcome
- Describe the role of financial statement analysis in assessing the credit quality of a potential debt investment
