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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

  1. A company's fixed charge coverage ratio (FCCR) is 1.1x. As a credit analyst, this indicates:

    Answer: Barely adequate coverage of fixed charges, leaving little margin for error

    An FCCR of 1.1x means earnings barely cover fixed charges (interest, lease payments, scheduled debt repayment), leaving almost no cushion for earnings deterioration.

  2. When using the indirect method to prepare operating cash flows, an increase in prepaid expenses would be:

    Answer: Subtracted from net income

    An increase in prepaid expenses represents cash paid out but not yet expensed, so it is subtracted from net income when reconciling to operating cash flow.

  3. A company's leverage ratio improved from 5.2x to 3.8x net debt/EBITDA. Which scenario would BEST explain this improvement?

    Answer: The company used operating cash flow to repay debt while EBITDA grew

    Leverage ratio improvement from debt repayment funded by growing EBITDA represents a sustainable deleveraging path, the most credit-positive scenario.

  4. The Altman Z-Score model is used in credit analysis primarily to:

    Answer: Predict the probability of corporate bankruptcy using financial ratios

    The Altman Z-Score combines multiple financial ratios into a single score to estimate a company's likelihood of financial distress or bankruptcy.

  5. A company reports capital expenditures of $800,000 and depreciation of $300,000. This relationship suggests the company is:

    Answer: Investing significantly more than the rate of asset depreciation, indicating growth investment

    When capex significantly exceeds depreciation, the company is expanding its asset base beyond mere replacement, which typically indicates growth-oriented capital investment.

  6. Which liquidity ratio would a credit analyst use to evaluate a company's immediate ability to meet obligations using only cash and marketable securities?

    Answer: Cash ratio

    The cash ratio (cash + marketable securities ÷ current liabilities) is the most conservative liquidity measure, excluding all non-cash assets.

  7. A distributor's gross margin is 12% while a specialty manufacturer's gross margin is 48%. This difference primarily reflects:

    Answer: Different business models with varying value-added content and competitive dynamics

    Gross margins vary significantly by industry based on value-added content, competitive intensity, and pricing power, so cross-industry ratio comparisons require industry context.