Credit Analyst interview questions

I reconcile earnings to recurring cash flow before judging repayment capacity.

• I start with EBITDA or operating profit, then deduct cash interest, cash taxes, maintenance capex, and the normal working-capital investment.
• I remove noncash income and test whether receivables or inventory growth is absorbing reported profit.
• I compare the result with scheduled principal and interest rather than treating positive net income as proof of repayment.

I accept adjustments only when they are identifiable, nonrecurring, and unlikely to require future cash.

• A closed facility's one-time severance may qualify if the closure is complete and the savings appear in the run rate.
• I reject recurring restructuring charges, speculative synergies, and owner expenses that are normal business costs.
• I show reported and adjusted leverage side by side so the credit decision does not depend on an aggressive add-back.

I divide recurring cash available for debt service by contractual interest and principal due in the same period.

• The numerator should deduct cash taxes, maintenance capex, and normal working-capital needs from sustainable operating cash flow.
• A 1.30x DSCR means a 30 percent cushion, not that the borrower can withstand every downside.
• I recalculate it under a stressed case because a seasonal or volatile borrower can look comfortable on an annual average.

I use fixed-charge coverage when rent, leases, or other unavoidable payments are material to the borrower.

• EBIT divided by interest can overstate capacity for a retailer with substantial store rent.
• The fixed-charge denominator should include interest, lease payments, and other recurring contractual charges defined by policy.
• I keep the definition consistent across periods because small classification changes can create a false improvement.

I model the monthly cash conversion cycle instead of relying on year-end balances or annual EBITDA.

• I map the inventory build, receivable collection, supplier terms, and peak borrowing month across at least one full season.
• I compare several years to separate normal seasonality from deterioration in collections or inventory turnover.
• Debt service is tested at the liquidity trough, when the borrower has the least cash and the highest line utilization.

I deduct maintenance capex from recurring repayment cash flow and treat growth capex as a separate funding decision.

• Maintenance capex is the spending required to keep current capacity and earnings, even if management labels all capex discretionary.
• Growth capex may create future cash flow, but I do not give credit until timing, execution cost, and demand are supportable.
• I compare capex with depreciation, asset age, and management's project list to challenge an unrealistically low maintenance estimate.

I size term debt to the lower of policy leverage and debt service that the stressed cash flow can support.

• I normalize EBITDA, deduct recurring cash needs, and solve for principal and interest at the proposed amortization and rate.
• I require meaningful DSCR headroom after a plausible downside rather than using the base case maximum.
• I then check maturity and residual balloon risk because acceptable annual coverage can still leave an unfinanceable final payment.

The maturity schedule shows when liquidity and refinancing risk crystallize.

• I map amortization, bullet maturities, leases, and committed line expiries by year.
• A borrower with moderate leverage can still fail if several facilities mature before cash accumulates or assets can be sold.
• I compare each maturity with free cash flow, available commitments, and realistic market access rather than assuming automatic refinancing.

I separate recurring working-capital needs from temporary releases that flatter cash flow.

• A receivables collection or inventory drawdown can boost one year but cannot support permanent debt if it will reverse next season.
• I review days sales outstanding, inventory days, payable days, and aging rather than only the net working-capital change.
• I normalize cash conversion using historical and peer ranges, then stress slower collections and reduced supplier credit.

I treat distributions as cash leakage unless they are clearly limited and subordinate to debt service.

• I compare historical distributions with free cash flow and check whether owners withdrew cash during weak periods.
• The structure should restrict distributions when leverage or coverage approaches a covenant threshold.
• If distributions are essential for owner taxes, I model the agreed tax amount explicitly rather than accepting an open-ended basket.

I identify the demand driver, the point in the cycle, and how quickly earnings fall when volume or price weakens.

• I review several years that include a downturn, not only the latest growth period.
• I compare fixed costs, capacity utilization, and working-capital needs because they determine how revenue pressure reaches cash flow.
• I size and structure debt to trough performance, with more headroom for sectors whose earnings and collateral values fall together.

Concentration creates earnings and liquidity risk because one commercial decision can remove a large share of revenue.

• I measure each major customer's share of revenue, gross profit, and receivables because the percentages can differ materially.
• I review contract length, termination rights, switching costs, and the borrower's replacement pipeline.
• I stress the loss of the largest customer and exclude concentrated receivables from collateral availability when policy requires it.

I test whether a critical input can be replaced without disrupting production, margin, or working capital.

• I identify sole-source items, supplier locations, lead times, minimum orders, and contractual pricing terms.
• I look for qualified alternatives and the time and cost required to switch, not just management's list of backup vendors.
• A weak supply position feeds the downside case through lower volume, higher input cost, and a larger inventory buffer.

I look for evidence that price increases stick without a material loss of volume or customers.

• I compare price, volume, and gross margin movements across periods of input-cost inflation.
• Contractual pass-through clauses are useful only if they reset quickly and cover the relevant costs.
• Low switching costs, commoditized products, and customer concentration weaken pricing power even when recent margins are strong.

Volume stability and break-even utilization matter most because a small revenue decline can cause a much larger cash-flow decline.

• I calculate the sales or utilization level at which contribution margin no longer covers fixed cash costs.
• I test contract visibility, customer churn, and the flexibility to reduce labor, rent, or capacity.
• The downside case uses operating leverage explicitly rather than applying the same percentage decline to revenue and EBITDA.

Durable barriers can support margins and cash-flow stability, but I require evidence that competitors cannot easily replicate them.

• Licenses, scarce distribution, embedded customer workflows, or cost advantages are stronger than brand claims alone.
• I check market-share stability and returns through a full cycle to see whether the barrier has protected economics.
• Technology change or regulation can erode a barrier quickly, so I include the required reinvestment in cash-flow analysis.

The entity map shows where cash, assets, debt, and legal claims actually sit.

• I identify the operating companies that generate cash and the entities that own material collateral.
• I trace intercompany loans, dividends, and management fees that can move value away from the borrower.
• The borrower, guarantors, and collateral grantors should align so repayment resources are legally available to the lender.

A guarantee is valuable only if the guarantor has capacity, access to cash, and an enforceable obligation.

• I analyze the guarantor's standalone cash flow, debt, contingent liabilities, and existing guarantee commitments.
• I confirm that local law, corporate authority, and documentation support enforcement and that no material limitation caps recovery.
• A guarantee from an asset-light or already leveraged affiliate adds little even if the consolidated group looks strong.

Structural subordination arises when debt at a holding company depends on cash left after operating-company creditors are paid.

• Operating-company lenders and trade creditors have first claim on that entity's assets and cash flow.
• The holding company receives value through dividends or intercompany payments that may be restricted by covenants or law.
• I reflect this weaker access through lower debt capacity, stronger guarantees or security, and often higher loss severity.

I test whether intercompany flows are recurring support or a channel that can drain the borrower.

• I reconcile receivables, payables, loans, fees, and dividends by counterparty and maturity.
• Large receivables from weak affiliates are not equivalent to cash and may need to be excluded from liquidity or collateral.
• I seek limits, subordination, or repayment controls when related-party transactions could move value outside the lender's reach.