medium · Corporate Credit Analysis
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?
- The ratio implies the company is over-investing heavily in fixed assets, well beyond current depreciation levels, reducing future maintenance capex needs.
- The ratio indicates that reported EBITDA is likely significantly higher than actual cash generation, signaling a potential future liquidity squeeze.
- 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.
- The high ratio suggests high-quality earnings that are well-backed by cash flow generation, supporting a stable CFADS outlook.
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