CFI CBCA Financial Analysis for Credit
Exam Questions All Solved.
Course Objectives - 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 - Answer Financial Analysis Overview
Financial analysis includes a number of steps to - 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 - Answer understanding the relationship between the income statement and
the balance sheet.
Performing Financial Analysis
Financial analysis must be undertaken with - Answer an end-purpose in mind. This will influence how
you conduct and interpret your analysis.
Credit Analyst - 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 - 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 - 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 - Answer actual current/historical results, as well
as using projected operating results.
There are two forms of financial analysis - Answer Vertical Analysis and Horizontal Analysis
Vertical Analysis - 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 - 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 - Answer identifying risk to repayment capacity. Falling behind industry trends
can be indicative of a company in decline
Ratio Analysis - Answer Performance Ratios
Financial Ratios
Performance Ratios
How profitable a company is and how efficiently it is being run - Answer Profitability Ratios
Efficiency Ratios
Financial Ratios
Financial condition of the company; liquidity, solvency, and how operating cash flow covers principal &
interest obligations - Answer Coverage
Leverage
, Liquidity
Breaking down the income statement - Answer Sales Revenue
Cost of Good Sold
Gross Profit
Indirect Costs
Research & Development
Marketing & Sales
Sales Revenue - Answer is the lifeblood of the income statement and is used in several of the ratios
seen throughout the module.
Cost of Good Sold - Answer relates to direct labor and raw materials needed to create the product or
service that is being sold, as well as depreciation on manufacturing equipment used in production.
Gross Profit - Answer is what remains to fund the rest of the business' indirect costs, after paying the
costs that were directly related to what was sold.
Indirect Costs - Answer are those expenses required to run the business. The most common are
research & development, marketing, sales, and general & administration.
Research & Development - Answer represent costs required to keep up with or stay ahead of the
competition.
Marketing & Sales - Answer represent costs required to get products or services out to customers (e.g.,
advertising).
Breakdown of income statement - Answer Sales Revenue
Direct Costs
Gross Profit
Research & Development
Marketing
Sales
Depreciation & Amortization
General & Administration
Income from Ops.
Interest Inc./Exp.
Taxes
Net Income
Exam Questions All Solved.
Course Objectives - 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 - Answer Financial Analysis Overview
Financial analysis includes a number of steps to - 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 - Answer understanding the relationship between the income statement and
the balance sheet.
Performing Financial Analysis
Financial analysis must be undertaken with - Answer an end-purpose in mind. This will influence how
you conduct and interpret your analysis.
Credit Analyst - 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 - 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 - 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 - Answer actual current/historical results, as well
as using projected operating results.
There are two forms of financial analysis - Answer Vertical Analysis and Horizontal Analysis
Vertical Analysis - 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 - 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 - Answer identifying risk to repayment capacity. Falling behind industry trends
can be indicative of a company in decline
Ratio Analysis - Answer Performance Ratios
Financial Ratios
Performance Ratios
How profitable a company is and how efficiently it is being run - Answer Profitability Ratios
Efficiency Ratios
Financial Ratios
Financial condition of the company; liquidity, solvency, and how operating cash flow covers principal &
interest obligations - Answer Coverage
Leverage
, Liquidity
Breaking down the income statement - Answer Sales Revenue
Cost of Good Sold
Gross Profit
Indirect Costs
Research & Development
Marketing & Sales
Sales Revenue - Answer is the lifeblood of the income statement and is used in several of the ratios
seen throughout the module.
Cost of Good Sold - Answer relates to direct labor and raw materials needed to create the product or
service that is being sold, as well as depreciation on manufacturing equipment used in production.
Gross Profit - Answer is what remains to fund the rest of the business' indirect costs, after paying the
costs that were directly related to what was sold.
Indirect Costs - Answer are those expenses required to run the business. The most common are
research & development, marketing, sales, and general & administration.
Research & Development - Answer represent costs required to keep up with or stay ahead of the
competition.
Marketing & Sales - Answer represent costs required to get products or services out to customers (e.g.,
advertising).
Breakdown of income statement - Answer Sales Revenue
Direct Costs
Gross Profit
Research & Development
Marketing
Sales
Depreciation & Amortization
General & Administration
Income from Ops.
Interest Inc./Exp.
Taxes
Net Income
