{"id":3501,"date":"2019-09-06T12:00:00","date_gmt":"2019-09-06T12:00:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=3501"},"modified":"2026-02-25T17:02:36","modified_gmt":"2026-02-25T17:02:36","slug":"financial-ratios-credit-analysis","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/fixed-income\/financial-ratios-credit-analysis\/","title":{"rendered":"Financial Ratios Used in Credit Analysis"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Fundamentals of Credit Analysis (2025 Level I CFA\u00ae Exam \u2013 Fixed Income \u2013 Module 6)\",\n  \"description\": \"This video covers the Fundamentals of Credit Analysis, exploring credit risk, default probability, and loss severity. It explains corporate debt seniority, credit ratings, rating agency risks, and the four Cs of credit analysis. Additionally, it examines key financial ratios, yield spread influences, and considerations for high-yield and government debt credit evaluation.\",\n  \"uploadDate\": \"2022-06-22T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/zSl9z7qQB00\/maxresdefault.jpg\",\n  \"contentUrl\": \"https:\/\/youtu.be\/zSl9z7qQB00\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/zSl9z7qQB00\",\n  \"duration\": \"PT41M06S\"\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Which of the following is a conservative coverage measure in credit analysis?\",\n    \"text\": \"Which of the following is a conservative coverage measure in credit analysis?\\n\\nA. FFO\/Debt.\\nB. EBIT\/Interest expense.\\nC. Free cash flow before interest.\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is B. EBIT\/Interest expense is a conservative measure of interest coverage because it focuses on the issuer\u2019s ability to cover interest payments and typically excludes depreciation and amortization.\"\n    }\n  }\n}\n<\/script>\n\n\n\n<p>\n  <iframe loading=\"lazy\"\n    src=\"\/\/www.youtube.com\/embed\/zSl9z7qQB00\"\n    width=\"611\"\n    height=\"343\"\n    allowfullscreen=\"allowfullscreen\">\n  <\/iframe>\n<\/p>\n\n\n<p>Key credit analysis measures fall into 4 different groups:<\/p>\n<h2><strong>Profitability and Cash Flows<\/strong><\/h2>\n<p>It is from operating cash flows that companies can service their debt payments. The operating income can be obtained by subtracting operating expenses from operating revenues, and it is commonly referred to as \u201cearnings before interest and taxes\u201d (EBIT). Below are other cash flow measures that are equally important and analysts should look at:<\/p>\n<ul>\n<li>earnings before interest, taxes, depreciation, and amortization (EBITDA);<\/li>\n<li>funds from operations (FFO): FFO as Net income from continuing operations plus depreciation, amortization, deferred income taxes, and other non-cash items;<\/li>\n<li>free-cash flow before dividends: net income plus depreciation and amortization excluding non-cash working capital and capital expenditures; and<\/li>\n<li>free-cash flow after dividends: free cash flow before dividends minus the dividends paid to shareholders.<\/li>\n<\/ul>\n<p><a style=\"display: block; margin: 20px 0 28px; padding: 14px 18px; border: 2px solid #2563eb; border-radius: 12px; text-align: center; color: #2563eb; text-decoration: none; font-weight: 500; font-size: 15px; background-color: #ffffff;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\"> Practice credit analysis ratios with CFA\u00ae-style questions. <\/a><\/p>\n<h2><strong>Leverage Ratios<\/strong><\/h2>\n<ul>\n<li>Debt\/Capital: where capital is total debt plus shareholder\u2019s equity. A higher ratio implies more leverage and thus higher credit risk.<\/li>\n<li>Debt \/ EBITDA: this is a very common leverage measure. A higher ratio implies more leverage and thus higher credit risk.<\/li>\n<li>FFO \/ Debt: credit rating agencies often use this leverage ratio. Since debt is in the denominator here, a higher ratio means a greater ability to pay debts.<\/li>\n<\/ul>\n<h2><strong>Coverage Ratios<\/strong><\/h2>\n<p>Coverage ratios measure the issuer\u2019s ability to meet or \u201ccover\u201d its interest payments.<\/p>\n<ul>\n<li>EBITDA\/Interest expense<\/li>\n<li>EBIT\/Interest expense: EBIT does not include depreciation and amortization, and it is considered a more conservative measure of interest coverage.<\/li>\n<\/ul>\n<h2><strong>The Issuer&#8217;s Liquidity<\/strong><\/h2>\n<p>While assessing an issuer\u2019s liquidity, credit analysts tend to also look at the following:<\/p>\n<ul>\n<li>cash on the balance sheet<\/li>\n<li>net working capital<\/li>\n<li>operating cash flow<\/li>\n<li>committed bank lines<\/li>\n<li>debt coming due and committed capital expenditures<\/li>\n<\/ul>\n<blockquote>\n<h3><strong>Question<\/strong><\/h3>\n<p>Which of the following is a conservative coverage measure in credit analysis?<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li data-tadv-p=\"keep\">FFO\/Debt.<\/li>\n<li data-tadv-p=\"keep\">EBIT\/Interest expense<\/li>\n<li data-tadv-p=\"keep\">Free cash flow before interest<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>B<\/strong>.<\/p>\n<p>Coverage ratios measure the issuer\u2019s ability to meet or \u201ccover\u201d its interest payments. EBIT\/Interest expense is a conservative measure of interest coverage since at times it does not account for the repayment of capital and excludes depreciation and amortization.<\/p>\n<\/blockquote>\n\n\n<div style=\"text-align:center; margin:42px 0 10px;\">\n\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\"\n     target=\"_blank\"\n     rel=\"noopener noreferrer\"\n     style=\"\n        display:inline-block;\n        padding:14px 34px;\n        background-color:#3f78d7;\n        color:#ffffff;\n        text-decoration:none;\n        font-weight:600;\n        font-size:18px;\n        border-radius:40px;\n        line-height:1.1;\n     \">\n     Start Free Trial\n  <\/a>\n\n  <p style=\"\n        margin-top:14px;\n        max-width:640px;\n        margin-left:auto;\n        margin-right:auto;\n        font-size:16px;\n        line-height:1.5;\n     \">\n     Solve CFA-style fixed income questions and strengthen your credit risk assessment skills.\n  <\/p>\n\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Key credit analysis measures fall into 4 different groups: Profitability and Cash Flows It is from operating cash flows that companies can service their debt payments. The operating income can be obtained by subtracting operating expenses from operating revenues, and&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[9],"tags":[],"class_list":["post-3501","post","type-post","status-publish","format-standard","hentry","category-fixed-income","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Credit Analysis Financial Ratios | CFA Level 1 - AnalystPrep<\/title>\n<meta name=\"description\" content=\"Explore key financial ratios used in credit analysis, including coverage, leverage, and profitability metrics to assess creditworthiness.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/fixed-income\/financial-ratios-credit-analysis\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Credit Analysis Financial Ratios | CFA Level 1 - 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