Ratio Analysis & Cash Flow Flashcards
7 cards from real CCP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Ratio Analysis & Cash Flow flashcards as text
A company has EBITDA of $500,000 and total debt of $2,000,000. What is its debt/EBITDA ratio, and how would a credit analyst typically interpret a ratio of 4.0x?
Answer: 4.0x; considered high leverage requiring close monitoring
Debt/EBITDA of 4.0x is generally considered high leverage, as most lenders prefer ratios below 3.0x–3.5x for investment-grade borrowers.
Which component of the cash flow statement reflects payments for purchasing machinery and equipment?
Answer: Investing activities
Capital expenditures for fixed assets like machinery and equipment are classified under investing activities in the cash flow statement.
A company's accounts receivable days outstanding (DSO) increased from 35 to 55 days year-over-year. What does this most likely signal to a credit analyst?
Answer: Potential deterioration in receivables quality or collection problems
Rising DSO indicates customers are taking longer to pay, which may signal collection problems, customer financial stress, or looser credit terms.
Free cash flow (FCF) is best defined as:
Answer: Operating cash flow minus capital expenditures
Free cash flow equals operating cash flow minus capital expenditures, representing cash available after maintaining and growing the asset base.
A retail company has an inventory turnover ratio of 3x compared to an industry average of 8x. What does this suggest?
Answer: The company may have excess, slow-moving, or obsolete inventory
An inventory turnover significantly below the industry average suggests the company holds excess inventory, which may be slow-moving or at risk of obsolescence.
Which ratio measures a company's ability to pay interest expense from operating earnings?
Answer: Interest coverage ratio
The interest coverage ratio (EBIT ÷ interest expense) measures how many times operating earnings can cover interest obligations.
A company shows positive net income but negative operating cash flow for two consecutive years. As a credit analyst, this pattern most likely indicates:
Answer: Potential earnings quality concerns and liquidity risk
Sustained positive net income with negative operating cash flow suggests earnings may be inflated by accruals that are not converting to cash, a significant credit risk.