- Credit analysis is the evaluation of the creditworthiness of a
company. Creditworthiness is the ability of a company to honor
its credit obligations. Creditors lend funds to a company in
return for a promise of repayment with interest. Creditors lend
funds in many forms and for a variety of purposes. Credit
analysis focuses on downside risk instead of upside potential.
This includes analysis of both liquidity and solvency. Liquidity
is a company’s ability to raise cash in the short term to meet
its obligations. Solvency is a company’s long run viability and
ability to pay long-term obligations. Equity analysis is
symmetric in that it must assess both downside risks and upside
potential. Equity investors provide funds to a company in return
for the risks and rewards of ownership. Equity investors are the
first to absorb losses when a company liquidates, although their
losses are usually limited to the amount invested. When a
company prospers, equity investors share in the gains with
unlimited upside potentia