THE ROLE OF CORPORATE FINANCIAL REPORT ANALYSIS IN CREDIT DECISION MAKING

Abstract

Analysis of corporate financial reports is useful in credit decision-making since it gives important information to lenders, investors and any financial institution that is interested in a given corporation. Analyzing specific common financial statements: balance sheet, income statement, and cash flow statement, creditors can determine the firm’s profitability, its ability to meet its obligations in the short term, its solvency, its general financial condition, etc. Credit analysis makes it possible to identify the capacity of the enterprise and its solvency in the future. The debt to equity, current ratio and the interest coverage ratios are calculation from these reports and act as benchmarks for risk assessment and credit granting. Moreover, the degree of companies’ financial reporting affecting the quality of the information presented, and the level of transparency and compliance with the accounting standards used have a great impact on the reliability of the reported information in the decision-making process. Introduction Today’s world is characterized by constant changes affecting businesses and economies in general, including severe economic instabilities and escalating market risks which may have a negative reflection on organizations’ financials. Thus, this paper aims to discuss the methodologies of a financial report analysis and reveal its importance in the context of credit decisions to argue the subject’s contribution to increasing the precision and confidence degree of the credit evaluations.