1. What is the importance of understanding the operating leverage, financial leverage, total leverage and breakeven point from a credit risk analysis perspective?
2. You are the credit manager of XYZ Bank. You have been provided with the following financial summary of a customer who enjoys credit facilities of US$18m.
|
US$'000
|
FY2007
|
FY2008
|
FYE 2009
|
FY2010
|
|
Turnover
|
15,664
|
21,843
|
22,085
|
25,967
|
|
Operating Profit
|
987
|
1,469
|
2,441
|
1,823
|
|
EBITDA
|
1,531
|
2,213
|
3,158
|
2,770
|
|
Profit before Tax
|
1,041
|
1,688
|
2,030
|
1,228
|
|
Gross Debt
|
4,031
|
4,994
|
7,963
|
8,830
|
|
Net Debt
|
3,670
|
4,321
|
7,034
|
8,219
|
|
Intangibles
|
300
|
200
|
100
|
0
|
|
Tangible Net Worth
|
7,030
|
8,719
|
10,748
|
11,977
|
|
Capital and Reserves
|
7,030
|
8,719
|
10,748
|
11,977
|
|
Free Cash flow
|
N/A
|
-1,154
|
1,092
|
706
|
|
CAPEX
|
3,985
|
547
|
1,826
|
708
|
|
Gross (Net) Debt/TNW (%)
|
0.57
|
0.57
|
0.74
|
0.74
|
|
Net Debt/EBITDA (x)
|
2.4
|
1.95
|
2.16
|
3.27
|
|
Current Ratio (%)
|
140%
|
162%
|
130%
|
127%
|
|
Quick Ratio (%)
|
136%
|
156%
|
125%
|
124%
|
|
Operating Profit Margin (%)
|
6.30%
|
6.72%
|
11.05%
|
7.02%
|
|
Interest Cover (x)
|
6.37
|
4.98
|
4.98
|
2.62
|
|
External Debt Repayment Period(Years)
|
NA
|
-4.3
|
7.3
|
12.5
|
Please provide your views on (i) profitability, (ii) capital structure and (iii) liquidity. It is evident that there is deterioration in net debt to EBITDA and interest coverage. Explain your views and clarify whether you would recommend reduction in existing credit facilities.