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Week 2/SEC 10K Assignment

The Balance Sheet and Credit Risk Analysis

Credit risk encompasses a company’s ability to meet its obligations as they arise as well as a long -run

ability to pay its debt. A company may be profitable but yet face bankruptcy if it is unable to pay its

liabilities on time. Companies with large amounts of debt have greater credit risk because of an

increased vulnerability to increases in interest rates and declines in profitability.

In this assignment, you will answer questions about your company’s classified balance sheet and

conduct a ratio analysis to evaluate the company’s liquidity and solvency . A financial ratio expresses the

relationship of one amount to another and enables analysts to quickly assess a company’s financial

strength, profitability, or other aspects of its financial activities.

Requirements

In the first section, define liabilities and describe how liabilities are classified as current and long -term

(give examples). Also define liquidity and solvency as it relates to the company’s debt -paying ability.

What does your company call its ‘Balance Sheet’?

In the second section, define working capital, the current ratio, and the debt ratio, three frequently used

ratios to assess credit risk (des cribed in LEO ’s online te xt or any principles of accounting text ). Identify

which are a measure of liquidity and which are a measure of solvency. Indicate how the ratio is

interpreted. Is an increasing or decreasing ratio a favorable trend? Conduc t online research to provide a

ratio level (or range) that is considered acceptable for the current and debt ratio (technically, working

capital is not a ratio so an average isn’t meaningful) . If you can find information on acceptable ranges

for the curre nt ratio and debt ratio for your company’s industry, include that in your discussion.

Numbers and ratios are more meaningful when considered relative to a benchmark. Benchmarks can be

the company’s past performance, a similar company’s performance, an industry average, or a rule -of-

thumb. For instance, for decades, a current ratio of 2 to 1 was considered satisfacto ry.

In the third section, prepare a table giving t he dollar amount of current and long -term liabilities for the

most recent year and the previous year. Either in the same table or a new table report the results of a

ratio analysis. Calculate working capital, current ratio, and the debt ratio for the curr ent year and the

past year (show your calculations) . Indicate whether the ratios are improving or deteriorating. If you find

a relevant benchmark (industry average or rule -of-thumb), comment on your company’s performance

relative to the benchmark.

Finally, in the fourth section briefly summarize results of an y or all of the following: 1) an internet search

for articles on recent events that may affect your company’s debt paying ability , 2) an internet search

for financial analysts’ assessment of the company ’s credit risk and or 3) management’s view of the

company’s current debt -paying ability as found in the Management Discussion and Analysis (MD&A)

section of the annual report . Either in this section or a conclusion paragraph, briefly summarize the

result s of your credit analysis by commenting on your company’s weakening or stronger financial

position (i.e. liquidity and solvency).

Technical requirements same as for the first paper. Business report, s ingle -spaced, use headings,

should be over one page; limit to two pages, cite references and provide reference list. Make a table in

Word (or Excel and copy into Word) as mentioned in the third section and provide appropriate and

column and row labels.