Category: Sector Analysis

Companies go abroad, but why ? An in-depth analysis of financial leverage

Last week I read an interesting article about a company which has moved all its production to Poland overnight (link). As always, mainly to monitor whether there is a correlation among the particular trends of the company, financial indicators and MORE Credit Rating assigned by us, I went about to check the credit rating of this company via s- peek application (it’s free , you can do it too, and I noticed that it was assigned by a credit rating of “red” and therefore I understood there was something not going well.

Obviously, I will not go on the motivations behind the relocation since the company was in bad shape in terms of economic / financial conditions, but I want more to dwell on the company’s situation from the point of view of a credit rating evaluation analyst. This company is characterized by a financial leverage equal to about 7, calculated as (total debt) / (shareholders’ equity).

At this point, I remembered a study that we -modeFinance -did during the 2012/2013 for the review of our rating model. Of course, an important element is to go and check ( state by state , sector by sector ) the distribution of the various financial indicators, discriminated between healthy companies and bankrupt companies, this study helps us understand how the various indicators are predictive for the rating .

Below I’ve presented the distribution of financial leverage indicators for Europe, for Italy, and for the companies went bankrupt (European): we are talking about the distributions by examining thousands of European financial accounts.

By means of the following graphs, I wanted to point out three things :

1) The companies that have went bankrupt are characterized by very high financial leverage in comparison with the healthy businesses as : the European median is 0.8, Italian median is 1.2 , median of bankrupt European companies is 1.4 (“discovery of hot water!”: an Italian idiom meaning “You’re a bit late, aren’t you?”, but it is always nice to have the confirmation from real data, even at European level);

2) The companies in Italy have a debt load similar to bankrupt companies rather than healthy ones;

3) A financial leverage of 7 actually indicates that the company is in a very serious financial situation (only 10% of healthy companies have a debt level so high).

So wan can say: in Italy the companies rely much more on banks than the companies abroad do (and therefore possibly the credit crunch in Italy is simply going to be in the same direction of the European Union), and if this company goes abroad with this much high financial debts: I wonder if the banks will be happy!

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