Credit Series- Myth on EBIDTA

“The company is able to pass on the increase in prices with a monthly/quarterly lag. They have been able to maintain EBIDTA margins YOY inspite of fluctuations in crude”.

 “This company has been able to consistently deliver EBIDTA margins of 10% in last 3 years”.

 I had come across these statements multiple times. Considering how each business is dependent on a core raw material where ultimate price- cost as well as sales- is dependent on a variable or benchmark, we all come across businesses similar to these.

Sensitivity is generally run on the EBIDTA % and conclusion mostly is that increase or decrease in raw material price can be passed on to customers.

But how many times do we consider the situation when even if EBIDTA margin is constant, due to the reduction in benchmark price absolute EBIDTA would be significantly lower.

Take the below example of a large corporate with raw material and finished product dependent on crude.


It was able to maintain constant EBIDTA margin % in first two and last two years.  However absolute amount points to the wide fluctuation in cash generated which would impact the surplus available for repayments.

Start looking at the price trends in clearly identifiable variables and understand that how the gap due to downward movement would be filled in even if margins in % terms would be maintained.

It’s the absolute EBIDTA and not the margins which will impact the loan repayments. 

Closer tracking of these movements will help understand and mitigate the risks in better way rather than only evaluating the financial covenants on DSRA or Debt to cash accruals which would be past historic data and would come after a time lag which may be too late at times.


Credit series – 8- Look beyond clean account Conduct

If a borrower is having a spotless conduct in loan repayment so far that is a good candidate for on boarding  or increasing exposure.

Yes, track record of loan repayment is a good data point to start with and give due weightage.

But then also look for the borrowing pattern of the customer :

  • If the majority of the borrowing is in form of revolving facilities where the servicing is only of interest , look from the perspective on ability of company to raise new funds if required .
  • If you have lent to the company by takeover with a top up look if that is generating the expected returns in line with end use. This is to avoid situation where due to the purpose being a general the funds are partly / fully used to service  your or other lenders loan.
  • With multiple lenders already there and new entrants coming in , multiple loans esp BL/PL with no collateral & end use restriction are being availed at the same time without one knowing about the other loan.

So if the borrowing is showing increase YOY without any commensurate change in business performance ; relook and understand the borrowing need , usage, future plans and overall serviceability which will act as leading indicator for any corrective action plan if required. Deterioration of account conduct is lagging indicator .

( Views expressed here are personal and doesn’t represent any of the present or past companies associated with ).


CREDIT SERIES-7- Look beyond the good numbers

This company has been consistently delivering excellent performance for the last 5 years inspite of challenging business environment with multiple business events including the crude movement on which its prices are dependent. Increasing sales YOY, margins remaining stable and leverage ratios well within the acceptable levels.

Further on one side rating has been upgraded but at same time promoters pledge was increasing.

credit 7

Closer look revealed that although borrowing is increasing with sales growth but some lenders moved out YOY. On discussion with those lenders it came up that business numbers and actual numbers don’t really match and not sustainable long term.