Benchmarking Credit Risk: Cash Is the Key

Compared with the same period last year, fewer midcap companies were slow to pay their bills in the third quarter of 2009.

Editor’s Note:
For a look at how three dozen industries are faring on key metrics associated with timely payment of invoices, check out the
2009 Credit Risk Benchmarking Report.

On the heels of a two-year economic downturn, most midcap companies are throwing off enough cash from their sales to be able to pay their bills on time, according to the third-quarter update of CFO’s 2009 Credit Risk Benchmarking Report.

In the third quarter of 2008, with Lehman Brothers collapsing and credit freezing up fast, the portion of midcaps that saw their cash performance decline compared with the year-ago quarter jumped from 40% to 47%. Perhaps as a signal of an improving economy, however, that trend has turned sharply: the percentage of companies with poorer cash performance (cash as a percentage of revenue) has dropped to 38%.

Midcaps’ increased ability to translate sales into bankable cash seems to have enabled them to pay their bills a tad more quickly. The portion of companies that saw a rise in their days payable outstanding — indicating tardiness in bill paying — dipped from 45% in Q3 2008 to 42% in Q3 2009.

Just 16% of the 550 companies culled from the CFO Midcap 1500 for the report could be dubbed credit risks in the third quarter of 2009 — down from the 18% that spawned such anxieties in the third quarters of 2008 and 2007. (The CFO Midcap 1500 consists of publicly traded companies headquartered in the United States that have annual revenues ranging from $100 million to $1 billion.) Companies may be credit risks, according to the report, if they deteriorate in three categories compared with the same quarter of the previous year: cash as a percentage of revenue (aka cash performance), days payable outstanding (DPO performance), and the company’s DPO as compared with its industry’s DPO.

Midcaps boosted their cash performance in 2009 in a number of ways. B&G Foods, for one, a $500 million maker of foods that have long shelf lives, saw its cash performance skyrocket by 247% and cut a day off its DPO in Q3 2009 compared with the same period last year. The cash-performance hike was fueled by low interest rates that cut the company’s debt payments and by the cash that B&G got from an equity issuance, says CFO Robert Cantwell. B&G used that cash to pay off debt, a move that reduced its interest expense and “effectively put more cash on the balance sheet,” he says.

Over a longer term, B&G has generated cash by keeping its capital spending low — about $11 million a year, a fairly low figure as a percentage of sales in the food industry, according to Cantwell. Partly as a cash decision, partly as a cost decision, the company has chosen to outsource the manufacturing of about a third of its products. “That has allowed us to not support with capital spending about a third of our production, which keeps our capital spending low,” says Cantwell.


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