Sample interview questions: Can you provide an example of how you have utilized financial ratios in credit analysis?
Sample answer:
- Example 1: Evaluating a Company’s Liquidity and Short-Term Solvency
During a credit analysis of a manufacturing company, I calculated several financial ratios to assess its liquidity and short-term solvency. The current ratio indicated that the company had sufficient current assets to cover its current liabilities by a comfortable margin, suggesting a low risk of liquidity issues in the near term. However, the quick ratio, which excludes inventory from current assets, revealed a tighter liquidity position, highlighting the need for close monitoring of cash flow and working capital management.
- Example 2: Identifying Potential Default Risk
In analyzing the creditworthiness of a corporate borrower, I employed financial ratios to evaluate the company’s debt servicing capacity and overall financial health. The debt-to-equity ratio showed a relatively high level of leverage, indicating a significant reliance on borrowed funds. Additionally, the times interest earned ratio was below industry standards, raising concerns about the company’s ability to meet its interest obligations from operating income. These findings prompted further investigation into the company’s cash flow and debt structure to assess the likelihood of default.
- Example 3: Assessing a Company’s Profitability and Efficiency
To evaluate the profitability and efficiency of a retail chain, I analyzed various financial ratios. The gross profit margin indicated a healthy spread between sales revenue and cost of goods sold, suggesting effective cost control. However, the net profit margin was lower than industry peers, prompting further examination of operating expenses and overhead costs. Additionally, the inventory t… Read full answer