Gateway NACM Credit Conference Presented by: Curtis Litchfield, CCE September 20, 2018

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1 Gateway NACM Credit Conference Presented by: Curtis Litchfield, CCE September 20, 2018

2 Who Receives and Analyzes Financial Statements? Why do you request them? What information are you trying to determine? What accounts are you mainly concerned with? Customer paying on time? Slow paying? Determine risk? High risk vs. Low risk? What ratios do you typically analyze?

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4 If your customer said they would only give you one number from their financials, which number would you want? Gross Profit Operating Income before Depreciation/Amortization Net Profit Interest Expense Current Assets A/R Inventory Revenues Tangible Net Worth Total Liabilities Current Liabilities A/P

5 Key Numbers I Look At: Cash Flow from Operating Activity Operating Income before Depreciation/Amortization Interest Expense Current Portion of Long-Term Debt (CPLTD) / Leases Gross Profit A/R Inventory Revenues Tangible Net Worth Total Liabilities Current Liabilities Current Assets A/P

6 Analyzing Financial Statements Common Figures Common Ratios Is Their Profit / Cash Flow Sufficient? Debt Coverage Ratios Times Interest Earned Debt Service Coverage Ratio Cash Flow from Operations DSCR

7 Key Ratios To Consider Leverage Debt to Equity Debt to Tangible Net Worth Liquidity Current Ratio Quick Ratio Efficiency A/R Turnover Inventory Turnover A/P Turnover Profitability Gross Profit Margin Operating Profit Margin Net Profit Margin Cash Flow

8 A creditor is ultimately concerned with the ability of an existing or prospective borrower to make interest and principal payments on borrowed funds. If a company you are selling to is no longer in good standing with their bank due to the inability to meet covenants or the inability to pay their loans, then the company will either have to seek funding from their vendors by stretching their bills, or file for bankruptcy. How profitable is your customer really? Does one set of ratios provide you with a clear picture?

9 ABC Corp. XYZ Corp. Net Profit $1MM Net Profit $100MM

10 Times Interest Earned Operating Income Interest Expense ABC Corp. Operating Income $2.6MM Interest Expense $ 50M Times Interest Earned 52.0x XYZ Corp. Operating Income $100MM Interest Expense $ 10MM Times Interest Earned 10.0x

11 Debt Service Coverage Ratio (DSCR) Net Income after taxes + Interest Expense + Depreciation + Amortization Current Portion Long-Term Debt (CPLTD) and Leases + Interest Expense ABC Corp. Net Income $ 1MM Interest Exp. $ 50M Dep./Amort. Exp. $ 500M EBIDA $1,550M XYZ Corp. Net Income Interest Exp. Dep./Amort. Exp. EBIDA $100MM $ 10MM $ 10MM $120MM CPLTD/L $ 0M Interest Exp. $ 50M Debt Service $ 50M DSCR 31.0x CPLTD/L $120MM Interest Exp. $ 10M Debt Service $130MM DSCR 0.92x

12 Cash Flow from Operations DSCR Cash Flow from Operations + Interest Expense Current Portion Long-Term Debt (CPLTD) and Leases + Interest Expense ABC Corp. Cash Flow from Operations $3MM Interest Exp. $ 50M Cash Flow $3,050M CPLTD/L $ 0M Interest Exp. $ 50M Debt Service $ 50M DSCR 61.0x XYZ Corp. Cash Flow from Operations $50MM Interest Exp. $10MM Cash Flow $60MM CPLTD/L $120MM Interest Exp. $ 10M Debt Service $130MM DSCR 0.46x

13 Ratio Analysis does not always end in a Yes or No answer to the question: Should we extend open credit terms? But it is a great start. A more advanced debt coverage analysis will include other items, such as: Additional one-time income/expense items Discretionary expenses Expenses on related party assets Capital expenditures Distributions/Dividends Subordinated debt Balloon payments Related party debt Receivables from a related party And mitigating factors

14 ROE is Net Income Equity Net Profit Margin x Total Asset Turnover x Leverage Return on Assets Net Income Sales x Sales Assets x Assets Equity Margins Turnover Leverage

15 Net Income x Sales x Assets Sales Assets Equity Margins x Turnover x Leverage Balance Sheet Income Statement Left debit Right - credit Sales COG Gross Margin Operating Expenses Operating Margin Interest & Taxes Net Profit Margin Current Long-term Investments Current Debt Long-term Debt Total Debt Equity Financing

16 Profit Margin Company Company Company Company Company Company Company Company Company Company Asset Turnover Company Company Company Company Company Company Company Company Company Company Financial Leverage Company Company Company Company Company Company Company Company Company Company

17 Profit Margin Asset Turnover Financial Leverage Return on Equity Company X 1.50 X 2.26 X Company X 0.89 X 2.44 X Company X 1.32 X 2.42 X Company X 1.25 X 2.26 X Company X 1.32 X 2.28 X Company X 3.09 X 3.58 X Company X 0.71 X 2.65 X Company X 1.99 X 2.51 X Company X 0.09 X X Company X 0.35 X 2.38 X 12.07

18 Questions Thank You