CLP Credit and Financial Analysis 1 — Questions and Answers
Question 1: What financial metric is most commonly used to evaluate a business’s ability to repay debt?
- Current Ratio
- Debt Service Coverage Ratio (Correct answer)
- Gross Profit Margin
- Return on Assets
Correct answer: Debt Service Coverage Ratio
The Debt Service Coverage Ratio (DSCR) measures whether a company generates enough income to cover its debt obligations.
Question 2: Which document provides the most comprehensive view of a company’s financial health?
- Invoice history
- Audited financial statements (Correct answer)
- Sales receipts
- Bank deposit slips
Correct answer: Audited financial statements
The audited financial statement includes the income statement, balance sheet, and cash flow, giving a full picture of financial stability.
Question 3: When analyzing a business credit application, what does a high current ratio typically indicate?
- Low profitability
- Strong liquidity (Correct answer)
- High long-term debt
- Low asset turnover
Correct answer: Strong liquidity
A high current ratio suggests the company can meet its short-term obligations using its current assets.
Question 4: Which factor is LEAST relevant when assessing personal guarantees in lease underwriting?
- Credit score
- Personal financial statement
- Personal hobbies (Correct answer)
- Tax returns
Correct answer: Personal hobbies
While personal hobbies may be of interest, they are not typically used in credit risk analysis.
Question 5: What is a key red flag when analyzing a lease applicant’s financial statements?
- Growing net income
- Positive retained earnings
- Negative cash flow (Correct answer)
- Increase in total assets
Correct answer: Negative cash flow
Negative cash flow indicates the business may struggle to meet lease payment obligations.
Question 6: Which of the following is a primary source of financial data used in credit evaluation?
- Social media activity
- Tax returns (Correct answer)
- Customer reviews
- Sales brochures
Correct answer: Tax returns
Tax returns provide verified income data and are a reliable tool for evaluating an applicant’s creditworthiness.
CLP Credit and Financial Analysis 1
What financial metric is most commonly used to evaluate a business’s ability to repay debt?