Credit analysis is a review conducted by an outside party on a business or individual to judge the subject’s ability to repay debt. This analysis typically involves a review of credit scores, cash flows, income, and the presence of sufficient collateral to pay back debt. The outcome of the analysis is a determination of whether to extend credit or loan money to the subject and if so, the amount to be committed. This analysis can also be used to estimate whether the credit rating of a bond issuer is about to change, which could present an opportunity to profit from speculating in ownership of the bonds.
A credit analysis usually involves a scoring system that is unique to the reviewing party, and which is designed to maximize its returns while minimizing bad debt losses. The analysis may involve various ratios for the analysis of debt loads, earnings volatility, and the adequacy of cash flows.