Why analysts need to consider different factors when evaluating the ability of a company to pay a short- or long-term debt?© BrainMass Inc. brainmass.com October 5, 2022, 5:05 pm ad1c9bdddf
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Analysts need to consider different factors when evaluating the ability of a company to pay a short or long term debt because it is usually a combination of factors that affect the credit worthiness of an organization. Reliance on a single factor to evaluate the credit worthiness of a firm may not be sufficient and may lead to incorrect decision. For example, we cannot evaluate the credit worthiness of a firm by just looking at liquidity ratios as it may not correctly reflect the ability of the company to generate sufficient cash to repay its short term and long term obligation. We need to combine our ratio analysis with other factors such as analysis of cash flow statements/free cash flow, analysis of overall business and industry environment, working capital management policies, debt-equity ratio, etc.
It is advisable to use multiple factors as a basis for evaluating the financial health and credit worthiness of organization because such comprehensive analysis allows analysts to cover multiple risks areas affecting the organization.
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