IFT Notes for Level I CFA® Program
IFT Notes for Level I CFA® Program

R55 Fundamentals of Credit Analysis

5.1. Credit Analysis vs. Equity Analysis: Similarities and Differences

In many ways, credit analysis may look similar to equity analysis, but there are some important differences:

Credit Analysis vs. Equity Analysis
Credit Analysis Equity Analysis
Analysis focuses on the downside risk: is the cash flow sustainable? Will the company be able to pay interest and principal? The focus is on analyzing the growth potential of a company (increase in EPS); how shareholder value will be maximized. How the company fares against its peers in the industry.
Management has a legal obligation to its bondholders. Maximizing shareholder value is the objective of management.
Analysts focus on balance sheet and cash flow statements. How much of total capital is debt and what is the seniority ranking of debt? Analysts focus more on income and cash flow statements.
Bondholders do not participate in the growth of a company but have limited downside risk in the event of a default. Shareholders have unlimited upside, but are more exposed to loss. They stand to lose their investment entirety before bondholders suffer a loss.