medium · Corporate Credit Analysis fsa

A company has a 'Sloan Ratio' of 18%. In constructing a 5-year CFADS forecast, how should a credit analyst interpret this metric regarding the company's EBITDA quality?

1. The ratio implies the company is over-investing heavily in fixed assets, well beyond current depreciation levels, reducing future maintenance capex needs.
2. The ratio indicates that reported EBITDA is likely significantly higher than actual cash generation, signaling a potential future liquidity squeeze.
3. The ratio is only relevant for equity analysts assessing dividend safety and has no bearing on the CFADS or debt service capacity of a corporate obligor.
4. The high ratio suggests high-quality earnings that are well-backed by cash flow generation, supporting a stable CFADS outlook.

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