What is importance of understanding the operating leverage

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Reference no: EM13925082

1. What is the importance of understanding the operating leverage, financial leverage, total leverage and breakeven point from a credit risk analysis perspective?

2. You are the credit manager of XYZ Bank. You have been provided with the following financial summary of a customer who enjoys credit facilities of US$18m.

US$'000	FY2007	FY2008	FYE 2009	FY2010
Turnover	15,664	21,843	22,085	25,967
Operating Profit	987	1,469	2,441	1,823
EBITDA	1,531	2,213	3,158	2,770
Profit before Tax	1,041	1,688	2,030	1,228
Gross Debt	4,031	4,994	7,963	8,830
Net Debt	3,670	4,321	7,034	8,219
Intangibles	300	200	100	0
Tangible Net Worth	7,030	8,719	10,748	11,977
Capital and Reserves	7,030	8,719	10,748	11,977
Free Cash flow	N/A	-1,154	1,092	706
CAPEX	3,985	547	1,826	708
Gross (Net) Debt/TNW (%)	0.57	0.57	0.74	0.74
Net Debt/EBITDA (x)	2.4	1.95	2.16	3.27
Current Ratio (%)	140%	162%	130%	127%
Quick Ratio (%)	136%	156%	125%	124%
Operating Profit Margin (%)	6.30%	6.72%	11.05%	7.02%
Interest Cover (x)	6.37	4.98	4.98	2.62
External Debt Repayment Period(Years)	NA	-4.3	7.3	12.5

Please provide your views on (i) profitability, (ii) capital structure and (iii) liquidity. It is evident that there is deterioration in net debt to EBITDA and interest coverage. Explain your views and clarify whether you would recommend reduction in existing credit facilities.

Reference no: EM13925082

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