The Daily Technical #77: What are the two types of credit ratios used to assess a company's default risk?

Good morning. Welcome to the 77th edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
What are some examples of non-recurring items?

Non-recurring items can significantly impact financial statements, so it's important to recognize them.

Common examples include legal settlements, restructuring expenses, inventory write-downs, and asset impairments.

By adjusting for these items, financial analysts aim to present a company's true operating performance. This process, often referred to as "scrubbing" the financials, helps normalize cash flows, providing a clearer picture of the company's financial health.

Common Mistakes

1. Confusing regular costs with non-recurring items. Distinguish them by ensuring the item is unusual and not a part of regular business operations.

2. Failing to comprehend why non-recurring items are adjusted. Remember, it’s about presenting a company’s core financial performance, so focus on items that skew this view.

3. Assuming all unusual events are non-recurring. Evaluate if the event could recur under different circumstances to make a precise categorization.

TL;DR

• Recognize legal settlements, restructuring costs, inventory write-downs, and asset impairments as non-recurring items.

• Adjusting for these items, known as "scrubbing" the financials, helps normalize cash flows by revealing true operating performance and financial health.

TODAY’S QUESTION
What are the two types of credit ratios used to assess a company's default risk?

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THAT’S A WRAP
See you tomorrow,

Mike Lukasevicz
Founder @ HirePrep