ExpertEasy1 markMultiple Choice
CPA · Question 36 · Area 2: Financial Statement Analysis
A company is evaluating the 'Creditworthiness' of a potential customer. Which ratio would be MOST relevant?
A company is evaluating the 'Creditworthiness' of a potential customer. Which ratio would be MOST relevant?
Answer options:
A.
Price-Earnings Ratio
B.
Times Interest Earned (Interest Coverage)
C.
Gross Margin
D.
Asset Turnover
How to approach this question
Think like a bank. What do you care about? Can they pay me back? That's Interest Coverage.
Full Answer
B.Times Interest Earned (Interest Coverage)✓ Correct
Credit analysis focuses on Solvency and Liquidity. Times Interest Earned measures the safety margin for paying interest obligations.
Common mistakes
Focusing on profitability (Margin) instead of solvency.
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