CCP Ratio Analysis & Cash Flow 2

Question 1

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?

Accepted Answer

4.0x; considered high leverage requiring close monitoring

Answer

Debt/EBITDA of 4.0x is generally considered high leverage, as most lenders prefer ratios below 3.0x–3.5x for investment-grade borrowers.

Question 2

Which component of the cash flow statement reflects payments for purchasing machinery and equipment?

Accepted Answer

Investing activities

Answer

Capital expenditures for fixed assets like machinery and equipment are classified under investing activities in the cash flow statement.

Question 3

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?

Accepted Answer

Potential deterioration in receivables quality or collection problems

Answer

Rising DSO indicates customers are taking longer to pay, which may signal collection problems, customer financial stress, or looser credit terms.

Question 4

Free cash flow (FCF) is best defined as:

Accepted Answer

Operating cash flow minus capital expenditures

Answer

Free cash flow equals operating cash flow minus capital expenditures, representing cash available after maintaining and growing the asset base.

Question 5

A retail company has an inventory turnover ratio of 3x compared to an industry average of 8x. What does this suggest?

Accepted Answer

The company may have excess, slow-moving, or obsolete inventory

Answer

An inventory turnover significantly below the industry average suggests the company holds excess inventory, which may be slow-moving or at risk of obsolescence.

(CCP) Certified Credit Professional Practice Test

(CCP) Certified Credit Professional Practice Test

CCP Ratio Analysis & Cash Flow 2