Lab 1

Lab 1-1 Part 1 Identify the Questions

Lab 1-1 Part 1 Analysis Questions
AQ1. Use what you know about financial statement analysis (or search the web if
you need a refresher) to generate three different metrics for evaluating financial
performance. For example, if you wanted to evaluate a company’s profit margin
from one year to the next your question might be, “Has Apple Inc’s gross margin
increased in the last three years?”
Answer:
Return on Equity (ROE):
Metric: ROE is a measure of a company's profitability that compares net income to
shareholders' equity. It is calculated as Net Income divided by Shareholders'
Equity.
Question: "How has XYZ Company's Return on Equity changed over the past
three years? Is the company effectively utilizing shareholders' equity to generate
profits?"
Current Ratio:
Metric: The current ratio assesses a company's ability to cover its short-term
liabilities with its short-term assets. It is calculated as Current Assets divided by
Current Liabilities.
Question: "Has ABC Corporation's current ratio improved or worsened over the
last fiscal year? Is the company capable of meeting its short-term obligations with
its current assets?"
Free Cash Flow (FCF):
Metric: Free Cash Flow represents the cash generated by a company's operations
that is available for distribution to investors, expansion, or debt reduction. It is
calculated as Operating Cash Flow minus Capital Expenditures.
Question: "How has DEF Inc's Free Cash Flow trended over the past two years? Is
the company generating enough cash from its operations to cover its capital
expenditures and potentially return value to shareholders?"
AQ2. Next to each question generate a hypothetical answer to the question to help
you identify what your expected output would be. You may use some insight or
intuition or search for industry averages to inform your hypothesis. For example:
“Hypothesis: Apple Inc’s gross margin has increased slightly in the past 3 years.”
Answer:
Return on Equity (ROE):
Question: "How has XYZ Company's Return on Equity changed over the past
three years? Is the company effectively utilizing shareholders' equity to generate
profits?"
Hypothesis: "XYZ Company's Return on Equity has shown a positive trend over
the past three years, indicating efficient use of shareholders' equity to generate
profits. This suggests strong management performance and potentially attractive
returns for investors."
Current Ratio:
Question: "Has ABC Corporation's current ratio improved or worsened over the
last fiscal year? Is the company capable of meeting its short-term obligations with
its current assets?"
Hypothesis: "ABC Corporation's current ratio has improved in the last fiscal year,
suggesting a stronger ability to cover short-term liabilities with current assets. This
may indicate improved liquidity and financial stability for the company."
Free Cash Flow (FCF):
Question: "How has DEF Inc's Free Cash Flow trended over the past two years? Is
the company generating enough cash from its operations to cover its capital
expenditures and potentially return value to shareholders?"
Hypothesis: "DEF Inc's Free Cash Flow has increased consistently over the past
two years, signaling strong operational cash generation and effective management
of capital expenditures. This may position the company well for future growth or
returning value to shareholders."
AQ3. Evaluate each question from Part 1. There are specific data attributes that
will help you find the answer you’re looking for. For example, if your question
was “Has [Company X’s] gross margin increased in the last 3 years?” and the
expected answer is “Apple Inc’s gross margin has increased slightly in the past 3
years,” this tells you what attributes (or fields) to look for: company name, gross
margin (sales revenues – cost of goods sold), year.
Answer:
Return on Equity (ROE):
Question: "How has XYZ Company's Return on Equity changed over the past
three years? Is the company effectively utilizing shareholders' equity to generate
profits?"
Data Attributes Needed:
Net Income for each of the past three years.
Shareholders' Equity for each of the past three years.
Current Ratio:
Question: "Has ABC Corporation's current ratio improved or worsened over the
last fiscal year? Is the company capable of meeting its short-term obligations with
its current assets?"
Data Attributes Needed:
Current Assets for the current fiscal year and the previous year.
Current Liabilities for the current fiscal year and the previous year.
Free Cash Flow (FCF):
Question: "How has DEF Inc's Free Cash Flow trended over the past two years? Is
the company generating enough cash from its operations to cover its capital
expenditures and potentially return value to shareholders?"
Data Attributes Needed:
Operating Cash Flow for each of the past two years.
Capital Expenditures for each of the past two years.
Lab 1-2
Lab 1-2 Part 1 Identify the Questions
Lab 1-2 Part 1 Analysis Questions (LO 1-3, 1-4)
Q1. Use what you know about loan risk (or search the web if you need a refresher)
to identify three different questions that might influence risk. For example, if you
suspect risky customers live in a certain location, your question might be “Where
do the customers with highest risk live?”
Answer:
Employment Stability :
Question: "What is the employment stability of loan applicants over the past three
years? Are there trends indicating frequent job changes or periods of
unemployment?"
Rationale: Employment stability is crucial in determining a borrower's ability to
make consistent loan payments. Frequent job changes or extended periods of
unemployment may increase the risk of default.
Debt-to-Income Ratio:
Question: "What is the average debt-to-income ratio of approved loan applicants?
Are there significant levels of existing debt in relation to their income?"
Rationale: A high debt-to-income ratio indicates that a borrower may already be
carrying a substantial amount of debt relative to their income. This could signal
potential difficulties in managing additional loan obligations, increasing the risk of
default.
Credit Score Changes:
Question: "Have there been significant changes in the credit scores of current
borrowers sincethe loan approval? Are there patterns indicating deteriorating
creditworthiness?"
Rationale: Monitoring changes in credit scores post-loan approval can highlight
shifts in a borrower's financial health. A declining credit score may indicate
financial distress and an elevated risk of default.
Q2. For each question you identified in Q1, generate a hypothetical answer to each
question to help you identify what your expected output would be. You may use
some insight or intuition or search the Internet for ideas on how to inform your
hypothesis. For example: “Hypothesis: High-risk customers likely live in coastal
towns.”
Answer:
Employment Stability:
Question: "What is the employment stability of loan applicants over the past three
years? Are there trends indicating frequent job changes or periods of
unemployment?"
Hypothesis: "Based on the analysis, a significant portion of loan applicants has
experienced frequent job changes or periods of unemployment over the past three
years. This suggests potential instability in employment, increasing the risk of loan
default."
Debt-to-Income Ratio:
Question: "What is the average debt-to-income ratio of approved loan applicants?
Are there significant levels of existing debt in relation to their income?"
Hypothesis: "The average debt-to-income ratio among approved loan applicants is
relatively high, indicating that a considerable portion of borrowers is already
managing substantial debt compared to their income. This higher ratio suggests a
potential challenge in managing additional loan obligations, contributing to an
increased risk of default."
Credit Score Changes:
Question: "Have there been significant changes in the credit scores of current
borrowers since the loan approval? Are there patterns indicating deteriorating
creditworthiness?"
Hypothesis: "Post-loan approval, a noticeable percentage of borrowers has
experienced a decline in their credit scores. This pattern suggests potential
financial challenges or mismanagement, indicating a higher risk of default among
this group."
Q3. Finally, identify the data that you would need to answer each of your
questions. For example, to determine customer location, you might need the city,
state, and zip code. Additionally, if you hypothesize a specific region, you’d need
to know which cities, state, and/or zip codes belong to that region.
Answer:
Employment Stability:
Data Needed:
Employment history for each loan applicant over the past three years.
Start and end dates of each employment period.
Any instances of unemployment and their durations.
Debt-to-Income Ratio:
Data Needed:
Total income for each loan applicant.
Detailed breakdown of existing debts (loans, credit cards, etc.) for each applicant.
Calculation of debt-to-income ratio using the above data.
Credit Score Changes:
Data Needed:
Initial credit scores of borrowers at the time of loan approval.
Subsequent credit scores at regular intervals post-loan approval.
Dates associated with each credit score update.
Lab 1-2 Part 2 Master the Data
Lab 1-2 Part 2 Analysis Questions (LO 1-3, 1-4)
AQ1. Evaluate each of your questions from Part 1. Do the data you identified in
your questions exist in the table provided? If so, write the applicable fields next to
each question in your document.
Answer: “Zip_code, addr_state”
AQ2. Are there data values you identified in Part 1 that don’t exist in the table?
Explain how you might collect the missing data or where you might locate it.

Q1 Q2 Q3/Q4 Q5
Does the customer
have many credit
accounts?
Risky customers
likely have
many credit
accounts
1.customer’s member
number (member_id)
2.The number of credit
accounts a customer
has (total_acc)
3.The customer’s total
available credit
(revol_bal)
How long is the
employment time
of the customer?
People with
short
employment
time are
potential risky
customers
1.customer’s member
number (member_id)
2.The length of the
employment time
(emp_length)
3. the total time of full-time
work experience
Total
employment
length
How long will the
customer pay back
the loan?
Risky customers
are likely to
have longer
time for
payment.
1.customer’s member
number (member_id)
2.The time length
customers promised to pay
back the loan
Loan term
Q1 Q2 Q3/Q4 Q5
Does the Risky customers 1.customer’s member number
customer have likely have (member_id)
many credit many credit 2.The number of credit
accounts? accounts accounts a customer has
(total_acc)
3.The customer’s total
available credit (revol_bal)

How long is People with 1.customer’s member number Total

the short (member_id) employment
employment employment 2.The length of the length
time time are employment time(emp_length)
of the potential risky 3. the total time of full-time
customer? customers work experience

How long will Risky customers 1.customer’s member number Loan term
the customer are likely to (member_id)
pay back the have longer 2.The time length customers
loan? time for promised to pay back the loan
payment