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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: James Clarke who wrote (2887)	12/30/1997 2:47:00 AM
From: Robert Graham	Read Replies (2) \| Respond to of 78670

I am no accountant, but bankruptcy in most cases is because of cash flow which in the formal meaning of the word has really nothing to do with how much debt (LT or even ST) a company has, or how it specifically compares to a comapny's cash reserves. This has to do with being able to meet immediate operational expenses. Technically speaking, a debtless company can go bankrupt. In other words, the question should be how liquid is this company is in the short term in its efforts to meet their operating costs. One aspect of this with a given company is how does working capital compare to quarterly operational expenses, and then to current liabilities as a measure of their liquidity, in other words the company's ability to meet necissary current expenses. Part of this depends how liquid their current assets actually are. The other more important aspect of this picture relates to how the company is managing its operational expenses in relationship to income. This refers to the company's ability to generate cash beyond that of their operational expenses, or how quickly they can arrive at this place before their cash reserves runs out. Their cash generation ability is impacted by their ability to manage A/R. This IMO is the "acid test". Next comes generating cash to meet current liabilities. If they have good credit with their suppliers, they probably can have their credit extended with them. Low debt can also help here which will help make the cost of servicing debt manageable, for if they default even on a comparatively small debt paymernt, that creditor can force the company into bankruptcy. Still, there is room for negotiation here. So this aspect of the picture at least for the near term is not as important as being able to manage immediate operational costs and A/R, given the current revenues that they have to work with. Cash in the bank helps here since it is unlikely that the company is efficient enough in their cash generating capability where they can survive strictly on the cash they can generate from their revenue as they do business. The next avenue for cash is aquiring ST debt which is not easy to do unless it has been preestablished such as in the form of a revolving credit line with a bank. Also, there is the higher cost of servicing ST debt. Otherwise, it is much easier to have suppliers extend credit to the company. Finally comes the consideration of generating new sales. This costs money. However, if the company cannot manage to sustain itself on its current revenue, then the company is forced to fight a losing battle. Thisis because generating new sales costs money and time, both of which the company may not have available to it. Restructuring may help here, but there are costs to the restructuring process itself, both in terms of money and opportunity costs of being dificient of resources that may be needed at a date in the near future in order manage the results of a successful marketing campaign which once again come at a later time. In summary, determine operational expenses seperate from debt servicing costs. Compare this figure to the cash the company can generate from its current revenue which relates to the current revenue compared with A/R turnover. Next, look at cash and compare this to the comapny's quarterly operating expenses. If the company's financials make it this far, then add in the costs to service debt. The actual figure for this will depend on the arrangement they can make with their suppliers and creditors. One assumption can be the interest expense of current LT and ST debt. Another is the coversion of ST debt into interest free longer term debt through extention of favorable credit terms from their suppliers. Finally, look at the prearanged lines of credit currently available to the company. Just some thoughts. Notice how current ST and LT debt figured peripherally into this analysis? Comments anyone? Bob Graham

To: James Clarke who wrote (2887)	12/30/1997 9:53:00 AM
From: Scott Mc	Respond to of 78670

James, sorry, I didn't mean to imply the 2 were the same, I was following LA about a year ago with the intent of buying their convertible bond, even did some "field research", fortunately for me I didn't pursue LA. As a runner I am interested in the different shoe companies (It really is a fairly small family), which IMO are just marketing companies, pushing their brand names. Yes I agree that Hyde is much much stronger and a good "Value Investment", its interesting to me how their finacials can vary so much from a basket case(LA) to a fat cat(Hyde). Scott