Credit Analysis and Financial Statement Analysis
What the exam tests
This domain tests whether you can move from reported numbers to a defensible view of a borrower's capacity to repay. Expect ratio analysis, cash-flow spreading, EBITDA adjustment, and projection sanity checks.
Core rules
- Spread at least three years and reconcile profit after tax to operating cash flow.
- Adjust EBITDA for one-offs, related-party rents, FX gains, capitalised costs, and directors' remuneration above market.
- Read liquidity, leverage, coverage, efficiency, and cash conversion together; a strong ratio in one area rarely offsets weakness in another.
- Base repayment on CFADS after tax, working-capital movement, and maintenance capex, not on accounting profit.
- Stress revenue and margin assumptions; test them against industry data and the borrower's own history.
Worked example
EBITDA ₦120m; working-capital increase ₦20m; tax ₦15m; maintenance capex ₦10m, giving CFADS of ₦75m. Interest ₦30m plus scheduled principal ₦25m equals ₦55m of debt service. DSCR = 75 ÷ 55 = 1.36x. Against a 1.25x policy floor the facility passes, but narrowly: a 20% EBITDA fall gives CFADS of ₦51m and DSCR of 0.93x. The reasoning shows the file needs a cushion, a shorter tenor, or a covenant tied to DSCR.
Traps
Using profit after tax as a proxy for cash; accepting EBITDA without adjustments; ignoring capex and working-capital swings; treating a revaluation reserve as liquidity; and missing off-balance-sheet or related-party obligations. Also check that projected growth is funded, not simply assumed.
Key points
- Repayment comes from cash, not accounting profit.
- Adjust EBITDA before calculating any coverage ratio.
- Stress test the DSCR, not only the base case.