Commercial Collections Blog

Assessing Credit Risk

It is always important for today’s credit executives to “look beyond the figures” when evaluating corporate financial statements. Following are some of the areas that credit and financial professionals should be aware of when assessing business credit risk.
First, you should determine whether there are any off-balance-sheet transactions such as operating leases that should be capital leases or capital leases that should be operating leases. Next, determine if there are any hedging strategies in place that may not be actual hedges.  Also, find out if derivatives being used are liquid and whether the company has what are called “naked” positions. Further, determine if any goodwill and intangible valuations are accurate and what assets are being valued and at what price.
Try to see if any large write-offs are in the works. If possible, try to ascertain whether the company is booking future revenue from long-term contracts in current periods. Also make sure to determine if swap transactions overstate revenue but add no realized value.

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