securitize

Securitize

The practice of a company selling accounts receivables or other debts owed to it. The third party that buys the debt assumes ownership of it and the responsibility for collecting the debts, and keeps the repayments when made. When it sells the debt to the third party, the company recognizes the sale price of debts as a positive cash flow under GAAP rules.

Investopedia Commentary

There are times when a business may need the help of specialized collections abilities of a third party collections agency in order to spur debt reconciliation from delinquent debtors. But companies sometimes securitize to materially adjust their operating cash flow performance.

By selling their debts to a third party - at a price usually significantly less than the value of the debts themselves - a company claims the cash flows sooner. If the company has poor cash flow in a given quarter, the securitizing helps cover up the poor performance on the financial statements. Investors therefore need to scrutinize the rationale behind a company's choice to securitize their debts, ensuring its purpose is to serve the company's bottom line instead of dressing up the financial statements.

Related Links

What Is A Cash Flow Statement?
Measuring Company Efficiency
The Essentials Of Cash Flow
How Some Companies Abuse Cash Flow

See also: Accounts Receivable - AR, Cash Flow, Cash Flow per Share, GAAP, Operating Cash Flow Ratio

Also spelled: securitizing, securitization

Main Entry: se·cur·i·tize
Pronunciation: si-'kyur-&-"tIz
Function: transitive verb
Inflected Forms: -tized; -tiz·ing
: to convert (assets) into securities typically by transferring them (as by sale) to a special trust, partnership, or corporation that issues them as securities with a resulting reallocation or reduction of risk and increase in liquidity for the company (as a bank) acting as the sponsor of the transaction —see also asset-backed security at SECURITY —se·cur·i·ti·za·tion /si-"kyur-&-t&-'zA-sh&n/ noun