CFI CBCA Financial Analysis for Credit
Question and answers verified to pass
Course Objectives - correct answer ✔-Understand the components that go
into financial analysis
-Calculate the key performance ratios that credit professionals use to assess
a company's profitability and efficiency
-Calculate the key financial ratios used to assess a company's liquidity,
leverage, and coverage
-Undertake a vertical analysis to determine profitability from the income
statement and proportionality from the balance sheet
-Undertake horizontal analysis to spot trends and analyze their meaning
-Perform industry benchmarking
Vertical & Horizontal Analysis - correct answer ✔Financial Analysis Overview
Financial analysis includes a number of steps to - correct answer ✔get a
complete picture of the performance of a company. The starting point is the
company's financial statements.
Ratio analysis is great for - correct answer ✔understanding the relationship
between the income statement and the balance sheet.
Performing Financial Analysis
Financial analysis must be undertaken with - correct answer ✔an end-
purpose in mind. This will influence how you conduct and interpret your
analysis.
,Credit Analyst - correct answer ✔-Understand a company's overall financial
health and a borrower's credit risk
-A company's ability to service credit obligations and how to mitigate loan loss
in a default scenario
Trend & Ratio Analysis - correct answer ✔Basic Ratio Analysis
Adjusting Ratios for Distortion
Complex Adjustments
Financial analysis is frequently conducted within the context of a specific
borrowing request. Lenders must - correct answer ✔overlay the proposed
credit facilities and loan terms on top of financial results to see how financial
metrics are impacted.
A credit professional may conduct the analysis using - correct answer
✔actual current/historical results, as well as using projected operating results.
There are two forms of financial analysis - correct answer ✔Vertical Analysis
and Horizontal Analysis
Vertical Analysis - correct answer ✔• Proportional point of view
• Compares line items in a financial statement to a base figure (e.g. express
line items as % of revenue)
• Can be used with the income statement to understand profitability
• Can be used with the balance sheet to understand asset/liability structure
• Helps benchmark externally
• Helps benchmark against internal thresholds which flow through to a risk
rating
• Ratios can be compared to industry performance
, • Set expectations and see if ratios fall within expectations
• If ratios fall outside of expectations, they will help you ask questions of your
client
Horizontal Analysis - correct answer ✔• Provides context both within the
company's own performance and through comparisons with peer groups
• Looks at trends in financial statements
• Benchmarks trends internally and externally against peers across a time
period
• Combining with vertical analysis provides more useful information
• Allows for consideration of liquidity, solvency, and leverage ratios
Example: Company A has positive revenue growth of 5% year-over-year
• A good indicator, unless the industry was outperforming it year-over-year
• Raises questions about sustainability, competitive advantage, and strategy
• What is their strategy to improve their competitive advantage?
• What threats have they identified and how are they mitigating them?
Analyzing credit means - correct answer ✔identifying risk to repayment
capacity. Falling behind industry trends can be indicative of a company in
decline
Ratio Analysis - correct answer ✔Performance Ratios
Financial Ratios
Performance Ratios
How profitable a company is and how efficiently it is being run - correct
answer ✔Profitability Ratios
Efficiency Ratios
Question and answers verified to pass
Course Objectives - correct answer ✔-Understand the components that go
into financial analysis
-Calculate the key performance ratios that credit professionals use to assess
a company's profitability and efficiency
-Calculate the key financial ratios used to assess a company's liquidity,
leverage, and coverage
-Undertake a vertical analysis to determine profitability from the income
statement and proportionality from the balance sheet
-Undertake horizontal analysis to spot trends and analyze their meaning
-Perform industry benchmarking
Vertical & Horizontal Analysis - correct answer ✔Financial Analysis Overview
Financial analysis includes a number of steps to - correct answer ✔get a
complete picture of the performance of a company. The starting point is the
company's financial statements.
Ratio analysis is great for - correct answer ✔understanding the relationship
between the income statement and the balance sheet.
Performing Financial Analysis
Financial analysis must be undertaken with - correct answer ✔an end-
purpose in mind. This will influence how you conduct and interpret your
analysis.
,Credit Analyst - correct answer ✔-Understand a company's overall financial
health and a borrower's credit risk
-A company's ability to service credit obligations and how to mitigate loan loss
in a default scenario
Trend & Ratio Analysis - correct answer ✔Basic Ratio Analysis
Adjusting Ratios for Distortion
Complex Adjustments
Financial analysis is frequently conducted within the context of a specific
borrowing request. Lenders must - correct answer ✔overlay the proposed
credit facilities and loan terms on top of financial results to see how financial
metrics are impacted.
A credit professional may conduct the analysis using - correct answer
✔actual current/historical results, as well as using projected operating results.
There are two forms of financial analysis - correct answer ✔Vertical Analysis
and Horizontal Analysis
Vertical Analysis - correct answer ✔• Proportional point of view
• Compares line items in a financial statement to a base figure (e.g. express
line items as % of revenue)
• Can be used with the income statement to understand profitability
• Can be used with the balance sheet to understand asset/liability structure
• Helps benchmark externally
• Helps benchmark against internal thresholds which flow through to a risk
rating
• Ratios can be compared to industry performance
, • Set expectations and see if ratios fall within expectations
• If ratios fall outside of expectations, they will help you ask questions of your
client
Horizontal Analysis - correct answer ✔• Provides context both within the
company's own performance and through comparisons with peer groups
• Looks at trends in financial statements
• Benchmarks trends internally and externally against peers across a time
period
• Combining with vertical analysis provides more useful information
• Allows for consideration of liquidity, solvency, and leverage ratios
Example: Company A has positive revenue growth of 5% year-over-year
• A good indicator, unless the industry was outperforming it year-over-year
• Raises questions about sustainability, competitive advantage, and strategy
• What is their strategy to improve their competitive advantage?
• What threats have they identified and how are they mitigating them?
Analyzing credit means - correct answer ✔identifying risk to repayment
capacity. Falling behind industry trends can be indicative of a company in
decline
Ratio Analysis - correct answer ✔Performance Ratios
Financial Ratios
Performance Ratios
How profitable a company is and how efficiently it is being run - correct
answer ✔Profitability Ratios
Efficiency Ratios
