Credit Analysis Flashcards
7 cards from real Banking practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Credit Analysis flashcards as text
Which ratio measures a borrower's ability to service debt from operating cash flow?
Answer: Debt service coverage ratio (DSCR)
DSCR compares net operating income to total debt service, indicating whether cash flow is sufficient to cover loan payments.
A company has EBITDA of $500,000 and total debt of $2,000,000. What is its leverage ratio?
Answer: 4.0x
Leverage ratio = Total Debt / EBITDA = $2,000,000 / $500,000 = 4.0x.
What does a negative working capital position typically indicate?
Answer: Potential short-term liquidity risk
Negative working capital means current liabilities exceed current assets, signaling potential difficulty meeting short-term obligations.
Which credit analysis framework uses Character, Capacity, Capital, Collateral, and Conditions?
Answer: 5 Cs of Credit
The 5 Cs of Credit is a widely used framework for evaluating a borrower's creditworthiness across five key dimensions.
In the context of commercial lending, what is 'enterprise value'?
Answer: Total market value of a firm including debt and equity
Enterprise value represents the total value of a business, calculated as market cap plus debt minus cash, used to assess collateral in leveraged lending.
Which of the following is a leading indicator of credit deterioration?
Answer: Declining accounts receivable turnover
Declining accounts receivable turnover suggests customers are taking longer to pay, which can signal cash flow stress and credit risk.
What is the primary purpose of a loan covenant in credit analysis?
Answer: To establish legal boundaries that protect the lender
Covenants are contractual conditions that restrict borrower behavior or require maintenance of financial ratios to protect the lender's interests.