Read the following discussion and give response:

1. An asset composition analysis is a tool that allows us to assess the risk exposure of a company’s capital structure. Generally, that asset a company employs determines the source of financings. A fixed asset likes land or buildings are not typically financed by short-term loans rather it is usually financed through equity capital. So if a company was using short-term loan to finance a fixed or long-term asset we could assume that this would expose them a good amount of risk. Just as a company that uses equity capital to finance a fixed asset would give the assumption that it is not exposing to much risk with this type of financing.

2. The relation between a company’s cash flows and its fixed charges is essential to analyzing the long-term solvency of a company. When computing the cash flow to fixed charges ratio it is better to use cash from operations rather than net income. This is because net income includes earned revenues that do not generate immediate cash and has incurred expense that do not need immediate cash. Therefore, net income is not a reliable measurement of a company’s available cash to meet its fixed charges.

3. An analysis of financial statements can improve on published bond ratings. Debt ratings are useful to a large proportion of debt issuances and there are inherent limitations of these procedures that can improve. The rating agency focuses on a company’s different characteristics like its earning power, management, financial resources and provisions of debt. Additionally the size of the company, market share, industry positions, recurring influences, and the general economic conditions are also importance when rating a company bond. These wide range of characteristics allow for the opportunity to identify the differences within the different rating classes and can further asses the favorable or unfavorable impact within those classes. The rating changes also lag the market provides an analyst with the opportunity to identify changes before they become recognized and reported by rating agencies.

Answer rating: 100% (QA)

I totally agree with the fact that the type of assets determines the type of financing Fixed assets ... View the full answer