Credit and Financial Analysis Flashcards

What financial metric is most commonly used to evaluate a business’s ability to repay debt?

Answer: Debt Service Coverage Ratio

The Debt Service Coverage Ratio (DSCR) measures whether a company generates enough income to cover its debt obligations.

Which document provides the most comprehensive view of a company’s financial health?

Answer: Audited financial statements

The audited financial statement includes the income statement, balance sheet, and cash flow, giving a full picture of financial stability.

When analyzing a business credit application, what does a high current ratio typically indicate?

Answer: Strong liquidity

A high current ratio suggests the company can meet its short-term obligations using its current assets.

Which factor is LEAST relevant when assessing personal guarantees in lease underwriting?

Answer: Personal hobbies

While personal hobbies may be of interest, they are not typically used in credit risk analysis.

What is a key red flag when analyzing a lease applicant’s financial statements?

Answer: Negative cash flow

Negative cash flow indicates the business may struggle to meet lease payment obligations.

Which of the following is a primary source of financial data used in credit evaluation?

Answer: Tax returns

Tax returns provide verified income data and are a reliable tool for evaluating an applicant’s creditworthiness.