Glossary: Pre2 Applications of FSA

Term	Definition
Credit Analysis	Assessment of a borrower’s ability and willingness to repay obligations
Four Cs of Credit	Character, Capacity, Collateral, Covenants (or Conditions); framework for credit evaluation
Character	Borrower’s reputation, integrity, and willingness to repay
Capacity	Borrower’s ability to generate cash flows sufficient to service debt
Collateral	Assets pledged as security for a loan
Covenants	Contractual terms restricting borrower actions to protect lender interests
Equity Screening	Using quantitative criteria (ratios, growth rates) to filter investment candidates
Backtesting	Testing an investment strategy on historical data to evaluate performance
Analyst Adjustments	Modifications made to reported financial statements to improve comparability and quality
LIFO Reserve Adjustment	Converting LIFO inventory and COGS to FIFO basis for cross-company comparison
Off-Balance-Sheet Adjustment	Bringing unrecognized items (operating leases, SPEs) onto the balance sheet
Normalization	Removing non-recurring items to assess sustainable earning power
Pro Forma Earnings	Adjusted earnings excluding certain items as defined by management (non-GAAP)
Peer Comparison	Benchmarking a company’s ratios and performance against industry peers
Sustainable Growth Rate	Growth rate achievable without external equity financing: ROE x retention ratio