introduction of study.docx

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INTRODUCTION OF STUDY

DEFINITION OF CREDIT RATING:

A published ranking, based cut_down_on detailed financial analysis by a credit

beareu, of one's financial history, specifically as it relates to one's ability to meet debt

obligation. The highest rating is usually AAA, and the lowest is D. Lender use this

information to decide whether to approve a loan.

DETERMINANTS:

The default-risk assessment and quality rating assigned to an issue are primarily

determined by three factors :

i) The issuer's ability to pay,

ii) The strength of the security owner's claim on the issue, and

iii) The economic significance of the industry and market place of the issuer.

RATING METHODOLOGIES:

Rating is a search for long-term fundamentals and the probabilities for

changes in the fundamentals. Each agency's rating process usually includes fundamental

analysis of public and private issuer-specific data, 'industry analysis, and presentations by the

issuer's senior executives, statistical classification models, and judgement. Typically, the

rating agency is privy to the issuer's short and long-range plans and budgets. The analytical

framework followed for rating methodology is divided into two interdependent segments.

The first segment deals with operational characteristics and the second one

with the financial characteristics. Besides, quantitative and objective factors; qualitative

aspects, like assessment of management capabilities play a very important role in arriving at

the rating for an instrument. The relative importance of qualitative and quantitative

components of the analysis varies with the type of issuer.

Rating is not based on a predetermined formula, which specifies the relevant

variables as well as weights attached to each one of them. Further, the emphasis on different

aspects varies from agency to agency. Broadly, the rating agency assures itself that there is a

good congruence between assets and liabilities of a company and downgrades the rating if the

quality of assets depreciates. The rating agency employs qualified professionals to ensure


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consistency and reliability. Reputation of the Credit Rating Agency creates confidence in the

investor. Rating Agency earns its reputation by assessing the client's operational

performance, managerial competence, management and organizational set-up and financial

structure. It should be an independent company with its own identity. It should have no

government interference. Rating of an instrument does not give any fiduciary status to the

credit rating agency. It is desirable that the rating be done by more than one agency for the

same kind of instrument. This will attract investor's confidence in the rating symbol given.

A rating is a quality label that conveniently summarizes the default risk of an

issuer.The credibility of the issuer's, proposed payment schedule is complemented by thecredibility of the rating agency. Rating agencies perform this certification role by exploiting

the economies of scale in processing information and monitoring the issuer. There is an

ongoing debate about whether the rating agencies perform an information role in addition to a

certification role. Whether agencies have access to superior (private) information, or if

agencies are superior processors of information; security ratings provide information to

investors, rather than merely summarizing existing information. Empirical research confirms

the information role of rating agencies bydemonstrating that news of actual and proposed

rating changes affects the price of issuer's securities.

Most studies document numerically larger price effects for downgrades than for

upgrades, consistent with the perceived predilection ofmanagement for delaying bad news.

Despite variations across individual rating agencies, the following features

appear to be common in the rating methodology employed by different agencies: Two broad types of analyses are done:

(a) industry and business analysis and(b)financial analysis The key factors considered in industry and business analysis:

(a) Growth rate and relationship with the economy

(b) Industry risk characteristics


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(c) Structure of industry and nature of competition

(d) Competitive position of the issuer

(e) Managerial capability of the issuer

The key factors considered in financial analysis:(a)Earning power

(b)Business and financial risk

(c)Asset protection

(d)Cash flow adequacy

(e)Financial flexibility

(f)Quality of accounting

Subjective judgments seem to play an important role in the assessment of the issue/issuer

on various factors. While each factor is normally scored separately, no mechanical formula is

used for combining the scores on different factors to arrive at the ratings conclusion. In the

ultimate analysis of variables which are viewed as interdependent industry risk characteristics

are likely to set the upper limit on rating

Business analyses:

It is the academic desciplines of identifying business needs and determining

solutions to business problems. Solutions often include a systems development component,

but may also consist of process improvement, organizational change or strategic planning and

policy development. The person who carries out this task is called a business analysts or BA.

Those BAs who work solely on developing software systems may be called

IT Business Analysts, Technical Business Analysts, Online Business Analysts or Systems

Analysts.

Business analysis as a discipline has a heavy overlap with requirement

analysis sometimes also called requirements engineering, but focuses on identifying the

changes to an organization that are required for it to achieve strategic goals. These changes

include changes to strategies, structures, policies, processes, and information systems.

Goal of business analysis

Ultimately, business analysis wants to achieve the following outcomes:


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Reduce waste Create solutions Complete projects on time Improve efficiency Document the right requirements

Business analysis includes:

Enterprise analysis or company analysis:

It focuses on understanding the needs of the business as a whole, its strategic

direction, and identifying initiatives that will allow a business to meet those strategic goals.

Requirements planning and management :

It involves planning the requirements development process, determining which

requirements are the highest priority for implementation, and managing change.

Requirements elicitation:

It describes techniques for collecting requirements from stakeholders in a project.

Requirements analysis

It describes how to develop and specify requirements in enough detail to allow them to

be successfully implemented by a project team.

Requirements communication

It describes techniques for ensuring that stakeholders have a shared understanding of

the requirements and how they will be implemented.

Solution assessment and validation

It describes how the business analyst can verify the correctness of a proposed

solution, how to support the implementation of a solution, and how to assess possible

shortcomings in the implementation.


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There are a number of techniques that a Business Analyst will use when

facilitating business change. These range from workshop facilitation techniques used to elicit

requirements, to techniques for analyzing and organizing requirements.

The best technique to analyse the business is SWOT analysis.This is used to

help focus activities into areas of strength and where the greatest opportunities lie. This is

used to identify the dangers that take the form of weaknesses and both internal and external

threats.

*The four attributes of SWOT are strength, weakness, opportunities and threats:.

Strength is defined as any internal asset, technology, motivation, finance, business

links, etc that can help to exploit opportunities and to fight off threats.

Weakness is an internal condition which hampers the competitive position or

exploitation of opportunities.

Opportunity is any external circumstance or characteristic which favour

the demand of the system or where the system is enjoying a competitive advantage.

Threat is a challenge of an unfavorable trend or of any external Circumstance which

will unfavorably influence the position of the system.

Financial statements Analysis:

The financial statements provide some extremely useful information to the

extent that the balance sheet mirrors the financial position on a particular date in terms of the

structure of assets, liabilities and owners equity, and so on and the profit and loss account

shows the results of operations during a certain period of time in terms of the revenues

obtained and the cost incurred during the year.

Thus, the financial statements provide a summarized view of the financial

position and operations of a firm. Therefore, much to be learnt about a firm from a careful

examination of its financial statements as invaluable documents performance reports. The

analysis of financial statements is thus, an important aid to financial analysis.The focus of

financial analysis is on key figures in the financial statements and the significant relationship

that exists between them. The analysis of financial statements is a process of evaluating the

relationship between component parts of financial statements to obtain a better understanding

of the firms position and performance.


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The first task of the financial analyst is to select the information relevant to

the decision under consideration from the total information contained in the financial

statements. The second step is to arrange the information in a way to highlight significant

relationships. The final step is interpretation and drawing of inferences and conclusion. In

brief, the financial analysis is the process of selection, relation and evaluation.

The term financial analysis is also known as analysis and interpretation of

financial statements. It refers to the establishing meaningful relationship between various

items of the two financial statements i.e. Income statement and position statement. It

determines financial strength and weaknesses of the firm. Analysis of financial statements is

an attempt to assess the efficiency and performance of an enterprise. Thus, the analysis and

interpretation of financial statements is very essential to measure the efficiency, profitability,financial soundness and future prospects of the business units.

Financial analysis serves the following purposes:

Measuring the profitabilityThe main objective of a business is to earn a satisfactory return on the funds invested in it.

Financial analysis helps in ascertaining whether adequate profits are being earned on the

capital invested in the business or not. It also helps in knowing the capacity to pay the interest

and dividend.

Indicating the trend of AchievementsFinancial statements of the previous years can be compared and the trend regarding various

expenses, purchases, sales, gross profits and net profit etc. can be ascertained. Value of assets

and liabilities can be compared and the future prospects of the business can be envisaged.

Assessing the growth potential of the businessThe trend and other analysis of the business provides sufficient information indicating the

growth potential of the business.

PARTIES INTERESTED

Analysis of financial statements has become very significant due to widespread

interest of various parties in the financial results of a business unit. The various partiesinterested in the analysis of financial statements are :


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(i)Investors:

Shareholders or proprietors of the business are interested in the well being of the

business. They like to know the earning capacity of the business and its prospects of

future growth.

(ii) Management:

The management is interested in the financial position and performance of the

enterprise as a whole and of its various divisions. It helps them in preparing budgets and

assessing the performance of various departmental heads.

(iii) Trade unions:

They are interested in financial statements for negotiating the wages or salaries or

bonus agreement with the management.

(iv) Lenders:

Lenders to the business like debenture holders, suppliers of loans and lease are

interested to know short term as well as long term solvency position of the entity.

(v) Suppliers and trade creditors:

The suppliers and other creditors are interested to know about the solvency of the

business i.e. the ability of the company to meet the debts as and when they fall due.

(vi) Tax authorities:

Tax authorities are interested in financial statements for determining the tax

liability.

(vii) Researchers:

They are interested in financial statements in undertaking research work in

business affairs and practices.

(viii) Employees :

They are interested to know the growth of profit. As a result of which they can

demand better remuneration and congenial working environment.

(ix) Government and their agencies:


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Government and their agencies need financial information to regulate the activities

of the enterprises/industries and determine taxation policy. They suggest measures to

formulate policies and and regulations.

(x) Stock exchange:

The stock exchange members take interest in financial statements for the

purpose of analysis because they provide useful financial information about companies.Thus;

we find that different parties have interest in financial statements for different reasons.

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