Insights from the Statement of Cash Flows

The statement of cash flows (SCF) can be used to answer 3 questions that are of interest to lenders: 1. Can the borrower generate enough cash to service the debt? 2. How has the borrower generated or used cash during the period? 3. How has the borrower's management performed during the period?...

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Bibliographic Details
Published in:Commercial Lending Review 2005-01, Vol.20 (1), p.39
Main Authors: Turpin, Richard A, Kittrell Smith, E L, Fulmer, John G
Format: Article
Language:English
Subjects:
Balance sheets
Borrowing
Cash flow
Cash flow statements
Commercial banks
Corporate profits
Credit analysis
Current liabilities
Earnings per share
Employees
Financial statements
Guidelines
Net income
Profitability
Stock options
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Summary:The statement of cash flows (SCF) can be used to answer 3 questions that are of interest to lenders: 1. Can the borrower generate enough cash to service the debt? 2. How has the borrower generated or used cash during the period? 3. How has the borrower's management performed during the period? When answering the first question, leander use various measures and rations to access a borrower's debt-paying capacity. Frequently, lenders use earnings before interest and taxes or earnings before interest, taxes, depreciation and amortization. When answering the second question, lenders should examine all 3 sections of the SCF. It is important for lenders to know whether a borrower is reinvesting for the future with cash generated from operations or, alternatively, disposing of productive assets and/or borrowing money in order to cover deficits in cash flows from operations. When answering the 3rd question, lenders try to see whether a borrower's management team has been aggressively controlling the company or if the company is simply being controlled by the economic environment.
ISSN:0886-8204