Introduction to Credit Management

The optimal debt/equity ratio depends on many variables like capital costs of other companies in the industry, the access for further debt financing and the stability of earnings. Another important measure for the company’s financial situation which can be drawn from the balance sheet is the working capital need, defined as the difference between current assets and current liabilities. Working capital must be related to other financial statement elements such as sales or total. The management of working capital is important for cash flows because it shows how efficiently a company manages its cash. It is defined as:

Working capital = Accounts receivable + inventory – accounts payable.

The amount of cash, marketable securities and noncore assets help to assess the liquidity situation and the financial flexibility of the company as well.

Property, Plant and Equipment are of particular interest to bondholders in case of financial distress, because the proceeds from asset sales are used to service the debt obligations.

Pension liabilities are an important topic in the analysis of corporate balance sheets and hence play an important role in the evaluation of corporate bonds. The two main pension schemes are:

• Defined contribution: the employer pays into a designated pension fund for the benefit of the employee. After the contribution the employer has no further obligation to the employee.
• Defined benefit: the employer agrees to pay to the employee an annuity (or lump sum) of a defined amount at retirement. This pension represents an ongoing liability for the employer.