VideoCFO Financial Benchmarks
Credit Risk Benchmarking Report
This report provides, at a glance, a quick means of gauging which companies in the CFO Midcap 1500 may pose a credit risk or merit closer scrutiny from their business partners. It covers 550 companies that had reported Q2 results by June 30, 2009.
The report measures individual companies on three common factors: cash as a percent of revenue, days payable outstanding (DPO), and DPO relative to industry. The significance of each factor is described below (see "Definitions"). For each factor, CFO Financial Benchmarks gave a green light to companies whose performance remained consistent or improved year-over-year. A red light was given for performance that deteriorated year-over-year. Companies with red lights for all three factors should be considered potential credit risks.
As with all financial benchmarks, many factors can affect a company's performance, and this report should be used only as a guide. A company that received red lights for all three factors ultimately may not prove to be a credit risk, but its finances probably do warrant further examination by your credit department.
Readers may download a list of all companies named in the report at no charge. The full report, which includes the benchmarks for each company named, is available for purchase online by clicking the link below.
» Download Full Credit Risk Report ($50.00)
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Definitions
What is Cash?
- The sum of cash and short-term investments (cash equivalents) as reported on the company's balance sheet.
Why is Cash as a Percent of Revenue important?
- Cash is the ultimate measure of a company's ability to pay its bills. While economic conditions can increase the pressure on company revenues, well-managed companies should adjust their expenses accordingly in an effort to keep cash as a percent of revenue reasonably consistent. Companies that demonstrate significant reductions in cash as a percent of revenue may be struggling to make ends meet and may pose a credit risk. A company whose cash as a percent of revenue remained equal or greater than the same measure one year earlier was assigned a green light. A company whose cash as a percent of revenue declined year-over-year got a red light.
Why is Days Payables Outstanding important?
- Days Payables Outstanding is a measure of how long it takes a company to pay for the goods and services it receives. A lengthening DPO is often considered a sign of financial distress, though it also can be the result of better working capital management (for example, the company may have renegotiated contract terms with its suppliers). For purposes of the 2009 Credit Risk Benchmarking Report, a DPO that now extends further than the same period in the prior year received a red light, while a DPO that is the same or shorter received a green light.
What is DPO vs. Industry and why is it important?
- In times of financial stress, entire industries can be adversely affected (for example, the automotive industry in 2008-2009). The 2009 Credit Risk Benchmarking Report examines the overall DPO performance of three dozen industries and then compares each company to the overall performance of its given industry. Thus, DPO vs. Industry indicates whether a company's DPO performance is in line with the rest of its industry (green light), or whether its DPO has lengthened beyond the average of its industry (red light).
How does CFO Financial Benchmarks measure DPO?
- CFO Financial Benchmarks uses the same methodology for DPO that CFO Magazine uses each year in the CFO/REL Working Capital Scorecard: Quarter-end trade payables divided by one day of average revenue. Days Payables Outstanding = Accounts Payable/(revenue/90 days) Note that many companies use cost of goods sold instead of revenue when calculating DPO. Our methodology uses revenue because it allows a balanced comparison across industries.
What is the CFO Midcap 1500?
- The CFO Midcap 1500 is an index created by CFO. Based on publicly reported data provided by Capital IQ, it consists of publicly traded companies headquartered in the United States that have annual revenues ranging from $100 million to
$1 billion.
