CFI CBCA Financial Analysis for
Credit Questions and
Answers
1. There are two forms of financial
analysis Answer Vertical Analysis and
Horizontal Analysis
2. Vertical Analysis
Answer • Proportional point of view
• Compares line items in a financial statement to a base
figure (e.g. express line items as % of revenue)
• Can be used with the income statement to understand
profitability
• Can be used with the balance sheet to understand
asset/liability structure
• Helps benchmark externally
• Helps benchmark against internal thresholds which flow
through to a risk rating
• Ratios can be compared to industry performance
• Set expectations and see if ratios fall within expectations
• If ratios fall outside of expectations, they will help you ask
questions of your client
3. Course Objectives
, Answer -Understand the components that go into financial
analysis
-Calculate the key performance ratios that credit professionals
use to assess a company's profitability and efficiency
-Calculate the key financial ratios used to assess a company's
liquidity, leverage, and coverage
-Undertake a vertical analysis to determine profitability from the
income statement and proportionality from the balance sheet
-Undertake horizontal analysis to spot trends and analyze their
meaning
-Perform industry benchmarking
4. Vertical & Horizontal Analysis
Answer Financial Analysis
Overview
5. Financial analysis includes a number of steps to
Answer get a complete picture of the performance of a company.
The starting point is the company's financial statements.
6. Ratio analysis is great for
Answer understanding the relationship between the income
statement
,and the balance sheet.
7. Performing Financial Analysis
Financial analysis must be undertaken with
Answer an end-purpose in mind. This will influence how you
conduct and interpret your analysis.
8. Credit Analyst
Answer -Understand a company's overall financial health and
a borrow-er's credit risk
-A company's ability to service credit obligations and how to
mitigate loan loss in a default scenario
9. Trend & Ratio Analysis
Answer Basic Ratio Analysis
Adjusting Ratios for Distortion
Complex Adjustments
10. Financial analysis is frequently conducted within the context
of a specific borrowing request. Lenders must
Answer overlay the proposed credit facilities and loan terms on top
of financial results to see how financial metrics are impacted.
11. A credit professional may conduct the analysis using
Answer actual current/histori- cal results, as well as using projected
operating results.
, 12.Horizontal Analysis
Answer • Provides context both within the company's
own perfor-mance and through comparisons with peer
groups
• Looks at trends in financial statements
• Benchmarks trends internally and externally against peers across
a time
period
• Combining with vertical analysis provides more useful information
• Allows for consideration of liquidity, solvency, and
leverage ratios Example
Company A has positive revenue growth of 5% year-over-year
• A good indicator, unless the industry was outperforming it
year-over-year
• Raises questions about sustainability, competitive
advantage, and strategy
• What is their strategy to improve their competitive advantage?
• What threats have they identified and how are they mitigating
them?
13.Analyzing credit means
Answer identifying risk to repayment capacity. Falling behind
industry trends can be indicative of a company in decline
14.Ratio Analysis
Answer Performance
Credit Questions and
Answers
1. There are two forms of financial
analysis Answer Vertical Analysis and
Horizontal Analysis
2. Vertical Analysis
Answer • Proportional point of view
• Compares line items in a financial statement to a base
figure (e.g. express line items as % of revenue)
• Can be used with the income statement to understand
profitability
• Can be used with the balance sheet to understand
asset/liability structure
• Helps benchmark externally
• Helps benchmark against internal thresholds which flow
through to a risk rating
• Ratios can be compared to industry performance
• Set expectations and see if ratios fall within expectations
• If ratios fall outside of expectations, they will help you ask
questions of your client
3. Course Objectives
, Answer -Understand the components that go into financial
analysis
-Calculate the key performance ratios that credit professionals
use to assess a company's profitability and efficiency
-Calculate the key financial ratios used to assess a company's
liquidity, leverage, and coverage
-Undertake a vertical analysis to determine profitability from the
income statement and proportionality from the balance sheet
-Undertake horizontal analysis to spot trends and analyze their
meaning
-Perform industry benchmarking
4. Vertical & Horizontal Analysis
Answer Financial Analysis
Overview
5. Financial analysis includes a number of steps to
Answer get a complete picture of the performance of a company.
The starting point is the company's financial statements.
6. Ratio analysis is great for
Answer understanding the relationship between the income
statement
,and the balance sheet.
7. Performing Financial Analysis
Financial analysis must be undertaken with
Answer an end-purpose in mind. This will influence how you
conduct and interpret your analysis.
8. Credit Analyst
Answer -Understand a company's overall financial health and
a borrow-er's credit risk
-A company's ability to service credit obligations and how to
mitigate loan loss in a default scenario
9. Trend & Ratio Analysis
Answer Basic Ratio Analysis
Adjusting Ratios for Distortion
Complex Adjustments
10. Financial analysis is frequently conducted within the context
of a specific borrowing request. Lenders must
Answer overlay the proposed credit facilities and loan terms on top
of financial results to see how financial metrics are impacted.
11. A credit professional may conduct the analysis using
Answer actual current/histori- cal results, as well as using projected
operating results.
, 12.Horizontal Analysis
Answer • Provides context both within the company's
own perfor-mance and through comparisons with peer
groups
• Looks at trends in financial statements
• Benchmarks trends internally and externally against peers across
a time
period
• Combining with vertical analysis provides more useful information
• Allows for consideration of liquidity, solvency, and
leverage ratios Example
Company A has positive revenue growth of 5% year-over-year
• A good indicator, unless the industry was outperforming it
year-over-year
• Raises questions about sustainability, competitive
advantage, and strategy
• What is their strategy to improve their competitive advantage?
• What threats have they identified and how are they mitigating
them?
13.Analyzing credit means
Answer identifying risk to repayment capacity. Falling behind
industry trends can be indicative of a company in decline
14.Ratio Analysis
Answer Performance
