THE FIRST QUESTION · EARNINGS · 1 OF 6
A distributor's EBITDA rose from US$4.0m to US$5.1m. The CFO's bridge adds back US$0.9m of 'one-off' restructuring costs. There have been restructuring costs in each of the last three years.
// THE GROUNDWORK / A · THE BORROWER28 FILES · ONE MINUTE EACH
THE IN-TRAY · THE GROUNDWORK · A
The Borrower
Can this business pay?
The borrower's own accounts and business: what it earns, what it collects, what it owes, what it is, and how far its numbers can be trusted.
// A1 · EARNINGS
SIGNAL OR NOISE · EARNINGS · 2 OF 6
A contractor recognises revenue as work progresses. This year its revenue rose 20%, cash received from customers rose 3%, and the 'contract assets' on its balance sheet doubled.
Signal or noise?
SIGNAL OR NOISE · EARNINGS · 3 OF 6
A manufacturer's gross margin rose from 22% to 27% in a year when its main raw material got dearer. The notes say it changed the way it costs its stock.
Signal or noise?
THE FIRST QUESTION · EARNINGS · 4 OF 6
A software company has moved from selling licences up front to annual subscriptions. Revenue fell 15% this year, deferred revenue on the balance sheet rose sharply, and cash collected was flat.
What do you read first?
THE FIRST QUESTION · EARNINGS · 5 OF 6
A travel agent now reports only its commission as revenue, instead of the full price of the holidays it sells. Revenue fell from US$80m to US$12m; profit is unchanged.
What happened to the business?
SIGNAL OR NOISE · EARNINGS · 6 OF 6
A builder's profit beat budget by US$1.2m. The notes show US$1.5m of warranty provisions from earlier years released back into profit.
Signal or noise?
6 FILES · PICK A CALL ON ANY OF THEM
// A2 · CASH
THE NUMBER · CASH · 1 OF 6
A wholesaler asks to size its working capital line.
- Debtor days
- 55
- Stock days
- 70
- Creditor days
- 40
- Sales a day
- US$100k
What is its cash conversion cycle?
THE FIRST QUESTION · CASH · 2 OF 6
A manufacturer reports net profit of US$3.0m and operating cash flow of US$5.5m. In the same year its payables days went from 45 to 80.
What do you make of the strong cash flow?
THE NUMBER · CASH · 3 OF 6
A distributor's year, in four numbers:
- Operating cash flow
- US$4.0m
- Maintenance capex
- US$1.5m
- Growth capex
- US$2.0m
- Dividends
- US$1.0m
How much cash does it generate after keeping its assets in shape, before growth and dividends?
SIGNAL OR NOISE · CASH · 4 OF 6
A borrower's customers have joined a supply-chain finance programme run by their banks. Its debtor days fell from 70 to 30 in one quarter. The relationship manager says it has 'fixed its collections'.
Signal or noise?
THE NUMBER · CASH · 5 OF 6
A supplier offers its customers 2% off for paying in 10 days instead of 40.
Roughly what annual rate is the supplier paying to be paid early?
THE FIRST QUESTION · CASH · 6 OF 6
A profitable company owes US$2m of tax for last year, due in one payment next month. The cash flow forecast it gave the bank spreads tax evenly across the year.
What do you ask first?
6 FILES · PICK A CALL ON ANY OF THEM
// A3 · BALANCE SHEET
THE FIRST QUESTION · BALANCE SHEET · 1 OF 6
A retailer adopts a new lease standard. Its balance sheet now shows US$40m of lease liabilities that used to sit only in the notes, and its debt to EBITDA moves from 1.5 to 3.8 times overnight.
What changed in the business?
SIGNAL OR NOISE · BALANCE SHEET · 2 OF 6
A borrower's notes disclose a guarantee it has given for a sister company's US$6m bank loan. Nothing appears on its own balance sheet.
Signal or noise?
THE FIRST QUESTION · BALANCE SHEET · 3 OF 6
A company carries US$30m of goodwill from past acquisitions against US$25m of equity. Its loan has a covenant on net worth.
What do you ask first?
SIGNAL OR NOISE · BALANCE SHEET · 4 OF 6
At last year's review a borrower's pension scheme was in surplus. After a fall in interest rates it now shows a US$8m deficit, and the company must agree a recovery plan with the trustees.
Signal or noise?
SIGNAL OR NOISE · BALANCE SHEET · 5 OF 6
A group's consolidated accounts show US$15m of cash. US$11m of it sits in a 60%-owned overseas subsidiary, whose minority shareholders must approve any dividend.
Signal or noise?
THE FIRST QUESTION · BALANCE SHEET · 6 OF 6
A company writes down a factory it bought two years ago by US$9m. EBITDA is unchanged; net profit swings to a loss.
What does the write-down tell a lender?
6 FILES · PICK A CALL ON ANY OF THEM
// A4 · BUSINESS
THE CALL · BUSINESS · 1 OF 6
Two printers each make US$2m of operating profit on US$20m of sales. One owns its presses and its costs are mostly fixed; the other rents capacity by the job and its costs are mostly variable. Sales fall 20% at both.
Whose profit falls further?
SIGNAL OR NOISE · BUSINESS · 2 OF 6
A family company's founder, who holds every major customer relationship, has begun handing meetings to the next generation. The accounts are unchanged.
Signal or noise?
THE CALL · BUSINESS · 3 OF 6
A supplier earns 55% of its revenue from one retailer. The retailer has just appointed a new head of procurement, who is reviewing every supplier.
What do you do with the file?
WHAT THEY HEAR · BUSINESS · 4 OF 6
Mid-review, the CFO says: 'We've lost the export licence we told you about, but the plan still works.' The plan was built on that licence.
What do you hear?
THE NUMBER · BUSINESS · 5 OF 6
A bakery sells 150,000 units a year at an average of US$10 each. Variable costs are US$6 a unit and fixed costs US$400k a year.
How far can its sales fall before it makes a loss?
THE FIRST QUESTION · BUSINESS · 6 OF 6
A borrower's half-year shows sales on budget and profit 30% below it. The management report puts the gap down to 'timing'.
What do you ask for?
6 FILES · PICK A CALL ON ANY OF THEM
// A5 · ASSURANCE
THE FIRST QUESTION · ASSURANCE · 1 OF 4
Three borrowers send accounts. One set is audited, one was reviewed by an accountant, and one was compiled from the owner's records.
What does each tell you about how far the numbers were checked?
SIGNAL OR NOISE · ASSURANCE · 2 OF 4
A borrower's audit report carries a paragraph headed 'Material uncertainty related to going concern'. The opinion itself is unmodified.
Signal or noise?
THE FIRST QUESTION · ASSURANCE · 3 OF 4
The auditor's opinion on a borrower's accounts is 'except for': it could not verify the stock at one warehouse, which holds 30% of inventory. The stock is the bank's main security.
What do you ask first?
SIGNAL OR NOISE · ASSURANCE · 4 OF 4
A borrower changes auditor for the second time in three years, each time citing fees. The new firm is much smaller.
Signal or noise?
4 FILES · PICK A CALL ON ANY OF THEM
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