I am a little apprehensive to ask this question but I think there are quite a few ways to analyze the makeup of a companies sources of funds and analysis of the makeup can be confusing to me. The ratios that I use are financial debt to equity, debt to total cap, Ebitda to interest, fixed charge coverage, equity ratio and the list goes on. The problem I have is that first of all I am fairly young so experience is not on my side with and second I cant seem to just look at a B/S and tell whether or not a company is highly levered or not. I get confused because some ratios say yes the co is highly levered and others do not. There are many adjustments to debt such as optg leases, deferred taxes, and what not and it has created a big headache to me. What is a good quick rule for for analysis of a B/S? here is what I was working on. The company was interested in a 500MM loan. I think they have no prob as they have cash and st inv of 9.7billion. They have 505MM of their total liab of 16.7billion that have fixed commitments. The company is highly leveraged by TL/TL+SHE (16.7/23 = 72%) but considering they have good cash then no problem with loan. What is your analysis of the company? Any help is appreciated. Assets (in millions) CA…4747 st inv…5060 AR…4414 Inv… 459 Other…2217 TOTAL CA. 16,897 liab and SHE AP…8895 Accrued …5241 TOTAL CL. 14,136 LTD… 505 other liab.2089 TOTAL LIAB 16,730 SHE common… 8195 Treasury…(10758) RE… 9174 Other loss… (82) TOTAL SHE…6,485 TOTAL LIAB&SHE 23,215
A very quick looks tells me that based solely on the balance sheet this company can easily handle the $500mm loan. I wouldn’t call this company highly levered due to its very conservative debt-to-equity ratio. Obviously they rely heavily on trade credit so the total liabilities distort the ratio you are using, but the balance sheet looks pretty liquid. I think for this company you need to spend a good chunk of time looking at the income statement. Earnings outlook will be important to get a feel for free cash flow generation potential. Spend some time on net working capital here as it looks important to this company. What little you can glean from the balance sheet about past results appears decent, as they have positive retained earnings and appear to have bought back a good chunk of stock, reflecting their strong capital position and likely pointing to solid operating cash flows in the past.
thanks for the information. I see your pt with the distortion of CL in that they rely on AP and this is interest free financing so it should not be included as financial debt. One question: Why do you suppose they have a strong capital position due to a stock buy back? I did not know this was a clue to strong capital. thank you
No hard and fast fule, just assuming that they 1) had enough operating cash flow to afford the buybacks and 2) their capital position was strong enough to support them without destroying their credit profile. That is a big assumption without further info, because companies certainly can and do take actions to benefit shareholders at the expense of their creditors. But their long-term debt is very modest compared to treasury stock, so it doesn’t look like they did a massive leveraged recap or anything like that. Said another way, I assumed they were able to iniate the buybacks because their existing equity base was sufficient to support their balance sheet. Potentially dangerous assumption without context, but seemed like a reasonable possibility from the limited info you gave.
OK got it. thank you for the analysis.