Hey, I’m having a hard time understanding exactly what’s going on here. A company sells its receivables but retains the risk associated with bad debts. How would you adjust the D/E and the Receivables turnover. D/E -> Upwards / Downwards RT -> Upwards / Downwards I get that you’ve just received money so your receivables goes up, thus increasing your recievables, depressing your RT But the part of the answer that talks about the D/E ratio says that this increases leverage ratios due to increased debt. thus increasing D/E. How does selling receivables, even if you’re still on the hook for the risk, increase the amount of debt you’ve got? Thanks in advance.
Remember that this is about financial statement analysis, which means adjusting ratios to reflect economic realities. In this case, the off-balance-sheet sale of receivables with recourse is economically the same as borrowing money and using your receivables as collateral (do you see that?). You should adjust your ratios accordingly.
Liability equal to receivable value added. Receivables added back to assets to balance. " How does selling receivables, even if you’re still on the hook for the risk, increase the amount of debt you’ve got? " It’s an accounting adjustment needed to balance the accounting equation. Receivables also have an inherent risk (not collecting), if that makes it easier to think about.
JoeyDVivre Wrote: ------------------------------------------------------- >In this case, the > off-balance-sheet sale of receivables with > recourse is economically the same as borrowing > money and using your receivables as collateral (do > you see that?). You should adjust your ratios > accordingly. Joey is right. Also remember that the customer still pays the company, and then the company pays the 3rd party who ‘bought’ the receivables.
OHHHH… I did not take into account that this was an off balance sheet item. And therefore, b/c you’re still servicing your receivables, you haven’t really gotten rid of them, just used them as a down payment on the loan you mention. This makes a lot of sense. Would this be the case if they had sold their receivables w/ out recourse? Thanks
Also. selling receivables w/ out recourse is like selling collections to a collections agency, Right?
Selling receivables without recourse is not debt. As you say, if you sold them to a collection agency and the collection agency recovered nothing, you could just shrug. Alas, there’s lots of ground between “with recourse” and “without recourse” (like you guarantee a 60% collection rate) so you might have to think about this in your analysis.
guys, anyone know why does EBIT increase by the amount of the interest expense? (for with recourse)