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IAI Actuarial Core Principles · Business Finance · Interpreting company accounting information

A bank is considering a three-year term loan to a manufacturing company. Which feature of the company's accounts would be of most direct interest to the bank in assessing the company's ability to meet interest and capital repayments?

The bank would be most interested in cash flow generation, interest cover and existing borrowings, because these show whether the company can pay interest and repay capital. Measures such as EPS or share price mainly concern equity investors, not lenders.

  1. AThe earnings per share figure compared with the previous year
  2. BThe proportion of shares held by promoters
  3. CCash flow generation and interest cover, together with the level of existing borrowingsCorrect
  4. DThe size of the directors' remuneration relative to turnover
  5. The company's share price performance over the last year

Explanation

Lenders focus on ability to service debt, so cash flow, interest cover and gearing are central. EPS and share price matter mainly to equity investors, and directors' pay is secondary to repayment capacity.

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