https://twitter.com/bentigg/status/1672577436200910848?s=46&t=cRYTXFssG7y_u80SVUSjNA

This tweet is asking which of the two companies, described by their financial metrics, is at a higher risk of defaulting on their obligations. Let's break down these financial metrics:

  1. Debt Service Coverage Ratio (DSCR): This is a measure of a company's ability to service its debt payments. It is calculated as net operating income divided by total debt service (principal and interest payments). A higher DSCR indicates a better ability to service debt. In general, a DSCR of 1.0 means that a company's operating income is equal to its debt payments, and anything less than 1.0 can indicate a risk of default.
  2. Cash Working Capital: This refers to the cash that a company has available to fund its daily operations. It is a measure of a company's liquidity and short-term financial health. A higher amount of cash working capital indicates a better ability to meet short-term obligations.

So let's look at the two companies:

  1. The first company has a DSCR of 1.5, meaning it has 1.5 times the income it needs to service its debt. It also has a substantial amount of cash working capital ($400K), which means it has ample liquidity to manage short-term obligations. However, it has loan payments of $50K.
  2. The second company has a higher DSCR (2.0), meaning it has twice the income it needs to service its debt, which is a strong position. However, it has significantly less cash working capital ($25K) and the same monthly loan payments of $50K. This means that while its income is higher relative to its debt payments, it has less liquidity to manage short-term needs.

Given these figures, the second company could be seen as having a higher risk of default, due to its lower cash working capital despite a higher DSCR. Despite having enough income to cover its debt, it might struggle with meeting immediate financial obligations due to its lower liquidity, especially if it experiences any unexpected costs or reductions in income.

Remember, risk of default is not only about the ability to make debt payments but also about the ability to manage operational costs, unexpected expenses, and any reductions in income. While DSCR is a useful metric, it doesn't cover the entirety of a business's financial health or risk of default.

https://twitter.com/ClintFiore/status/1674387187968757762

The key concepts to understand here are:

  1. Revenue: This is the total amount of income generated by the sale of goods or services related to the company's primary operations.
  2. EBITDA: This stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It's a measure of a company's operational profitability.
  3. Work Trucks: These are key assets for a plumbing company because they allow the company to provide its services. The age of these trucks matters because older trucks may require more maintenance and are closer to needing replacement, which is a future cost.
  4. Depreciation: This is the loss in value of a physical asset over time. In this case, it's important to consider the depreciation of the trucks.

Here's how we can analyze this:

  1. Determine the value of the companies based on EBITDA: If we assume an industry multiple is 4x (for example), both companies would initially be worth $700K (EBITDA) * 4 = $2.8M.
  2. Consider the depreciation of the trucks: The cost of a new truck is $100K, and each truck is replaced every 10 years, meaning each truck depreciates by $10K each year ($100K/10 years).