HOW DO I ...... ?

[Mark Johnson]

I'd like to invite folks to post CI problems they face, and tap into the combined might and expertise of the intelligence gurus assembled.

I'll begin this discussion with a question I got late yesterday afternoon from a fellow CI professional.

We are looking at a hypothetical company listed on the London stock exchange. The company has been under some stress and we want to know whether this company will be able to handle debt payments. We have a 3 page Equity Research report on the company with several years of financial measures.

We have several questions:
1. For those of us in the US, where would we go for more detailed financial reporting data on this company. Hopefully we'd like historical data for several years, and would like Income Statement, Balance Sheet, and Cash Flow Statements. It would be nice if the data was available electronically and free.

1a. Are there differences in terminology that would be important. For example...Revenue in the US is generally referred to as Turnover in other countries. Certain financial ratios common in the US may not be used internationally.

2. What financial measures should we look at to see if this company will be able to service its debt?

3. How do you calculate a "burn rate" to estimate ability to pay?

I know what I concluded on this particular company ... that it showed ability to pay, but that there were inconsistencies in its financials that were troubling and made me believe their reporting was manipulated to show better liquidity than the company really had. Obviously, the "right" answer will have to wait to see if this company is able to survive. But I wanted to get some discussion going to see how others would attack this problem and where you'd go to gather more information.

Mark Johnson

[Emily Cunningham Rushing]

It's far from free but I have found that Bloomberg and SEC filings have been very helpful with similar projects. I also have referenced D&B credit reports that our library pulls for us.

I hope that helps. I'd love to hear anyone else's suggestions. I'm learning so much about financial research and analysis. Thanks so much for the outstanding question, Mark.

Best regards,
Emily

[Vivek Raghuvanshi]

I remember while preparing Credit Reports, while calculating how much credit could be extended on :

1. Secured Basis
2. Unsecured Basis

Keeping in mind the manipulations done by organisations to dress up financial statements, I would look at PAT:

PAT x 1/4

PAT x 1/6

PAT x 1/8

In a nutshell. But there is so much more:

Project Debt : Equity Ratio etc.....

For example Infrastructure projects ideally go in for Debt : Equity as 4:1

[Nimalan]

Hi Mark,

Well if this company is pretty big,

- Analyst reports: there would be loads of analyst reports available where extensive analysis would have been done already
- Conference call transcripts: Read between the lines through conference call transcripts (www.seekingalpha.com) and see what the CFO/CEO /Inv. relations manager is evading / answering.
- Speak to the analysts covering the industry / company: They actually know more than they put in the report
- Speak to people in the company: Finance department / Investor relations / Ex employees / Suppliers

Ideally the first two options only allow us to estimate and form hypothesis. Speaking to people helps zero in on the correct hypothesis. Actually speaking to the right people always helps more than the reports!

Hope this helps.

Nimalan

[Mark Johnson]

Great suggestions. The company has about 2.3B GBP in sales, and 350M GBP market capitalization. The financials I saw were from an Analyst report (EXANE BNP PARIBAS), but not much was discussed in the detail beyond their consensus earnings and estimates going forward.

I used to be a fan of analyst reports, but have generally found they will not really say anything derogatory about a stock. They will continue to sing the praises of a company until nearly EVERYONE knows the company is filing bankruptcy. Major analysts were still saying "buy" during the recent round of failures, until the week before the companies failed.

The only source I know of for British company financials (without a Thomson Reuters subscription) is Companies House. Are there other services that report financials in a convenient form? I surprised myself during this exercise when I did NOT think to go to the company website for access to the most recent financials.

Also, the statement uses the term WCR, which I see is defined as Working Capital Requirement. I've not seen that term used in statements in the US. As I read up on this, I find it is a very helpful concept.

It would be very helpful if someone who analyzes financials outside the US could help translate terms that may be unfamiliar, or at least add to the discussion with other terms which may not be in common usage everywhere.

[Vivek Raghuvanshi]

Mark,

"We are looking at a hypothetical company listed on the London stock exchange. The company has been under some stress and we want to know whether this company will be able to handle debt payments. We have a 3 page Equity Research report on the company with several years of financial measures."

Debt payment capacity is Project specific:

1. Gestation period? 5 years, 10 years, 15 years
2. What is the Debt : Equity Ratio on each of its projects

3. Project Feasibility report - what is the new project / projects they are working on - why is the project feasible. - Check out Cash flows.

4. Who are the Promoters? - 50% risk assessment technically depends on who are the Promoters on each of its projects:

A. Are they a Consortium? or just a JV or a Merger or a Acquisition - Scenario differs every time.

Talk to the External Auditors and pitch to the Client why they require you to make the difference in the profits.