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I noticed that a company I'm researching took out a $10 mil. line of credit. Can anybody tell me if I should include that $10 mil. figure as part of the short term debt when trying to calculate the Flow Ratio? Do I use it in the cast-to-debt ratio calculation? What about the Operating Cash Flow and the Cash-to-current debt ratios? Do I just use the whole $10 mil. or what? Thanks, in advance, for any help with this.
-- Ben
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Lines of credit is debt. If it is listed under Current Liabilities, it is Short Term Debt, otherwise it is Long Term Debt. Most of the time it will be ST Debt. Lines of Credit tend to be revolving loans that help to smooth bumps in cashflow.

Debt does not impact Chasf Flow from Operations, it is a financing cash flow.

Marv
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Ben,

Just because the company took out the line of credit doesn't mean they actually got the money. Once the company actually borrows part of the line of credit, that amount will show up on the balance sheet as short-term debt. At that time, you would exclude whatever was in s-t debt from your Flowie calculation. Otherwise, the line of credit is mere potential.

Best,
Bob

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TMFBobdog,

the line of credit is mere potential.

As a check of my understanding: A company establishes a line of credit, paying a fee for the privilege, in order to have "instant" borrowing power to take advantage of opportunities that might not wait.

It would be similar to me having Master Card checks but only using them in a true emergency. No significant cost to me as long as my other (non-interest bearing) sources of cash are adequate.

Thanks for your confirmation.

Bruce
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I'd like to echo TMFBobDog's check of understanding. As I get it now, the $10 mil. line of credit item that I spotted doesn't get figured into the Flowie or into the Cash-to-debt ratios or the Cash-to-current debt ratio or the cast-to-liability ratio. It's just potential and when it gets used it will appear as "Short-term debt." Is that right?
Thanks for all who responded.
-- Ben
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Bruce,

It would be similar to me having Master Card checks but only using them in a true emergency. No significant cost to me as long as my other (non-interest bearing)
sources of cash are adequate.


This is pretty much my take on it as well. The only difference I would note is that lines of credit are probably not for emergencies, but rather to smooth cash flows during the normal course of business.

Best,
Bob
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As I get it now, the $10 mil. line of credit item that I spotted doesn't get figured into the Flowie or into the Cash-to-debt ratios or the Cash-to-current debt ratio or the cast-to-liability ratio.

If "line of credit" with a balance is showing up on the balance sheet under current liabilities, it is a real interest bearing debt which should be used in all calculations involving short term debt.
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Right ... ok ... I get that. But how do I know if it's a "line of credit with a balance," as you describe, or simply a line of credit which has been opened but not used? Specifically, here's how that part of the Balance Sheet looks (from the 10K):

Current Liabilities: 1999 1998
Accounts payable $ 6,816 $6,180
Accured payroll ,etc. 5,536 5,566
Taxes based on income 1,235 95
Line of credit 10,000 --
Current port. LT debt 4,645 3,699
Other current liabilities 2,736 5,068
-------- --------
TOTAL CURR. LIAB. 30,968 20,608

Long-term debt 1,407 1,359

That's the 10K for the year ending 12/99

The Balance Sheet for the latest 10Q (quarter ending 6/99) shows, among other items,

6/30/00 12/31/99

Line of credit $12,300 $ 10,000

The Managements Discussion section of the 10K states the following:

"As of December 31, 1999, we had in place a $15.0 million unsecured line of credit expiring October, 2002, and a $10.0 million unsecured line of credit expiring October 2000 ... At December 31, 1999, there was $10.0 million outstanding under the $15.0 million line of credit, with $14.4 million available under the combined lines, after considering outstanding letters of credit."

So, if I understand what you're saying, I should take that $10.0 million figure that appears under "Current Liabilities" and add it to the "current portion of LT debt" when I calculate such things as Flowie, Cash-to-Debt ratio, etc. etc.

Right?
Sorry for the long post, and many thanks for your help.
-- Ben
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Ben,

In general, yep, you've got it.

The key point here is that a line of credit is essentially a short-term loan. The company has borrowed, and is paying interest on, $10 mn of what it could possibly borrow. This would be subtracted from current liabilities for the Foolish Flow Ratio, and added to L-T debt and current of L-T to come up with a total debt figure.

The rule of thumb here is that if it shows up on the balance sheet, it's a short-term loan and should be dealt with accordingly. But, if it's only in the notes, it's merely potential, and should be ignored when calculating Flowie and total debt.

Keep up the good work.

Bob
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So, if I understand what you're saying, I should take that $10.0 million figure that appears under "Current Liabilities" and add it to the "current portion of LT debt" when I calculate such things as Flowie, Cash-to-Debt ratio, etc. etc.

That's correct. Whatever appears under the current liabilities is the actual amount that the company is obligated for within a year.
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I wish I had seen this thread earlier, maybe I could have answered your questions from a hands-on point of view. I am a farmer and unfortunately need a Line of Credit to get through most seasons. You guys seemed to have nailed it though. You have the whole line at your disposal, but the only debt is what actually shows up on the balance sheet. It is usually listed in short term because it is just something used to get through the "cash poor" times. Then it is usually renewed each year. Those short term amounts are usually paid off when cash becomes available to do so. Sorry so late.
moon
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Better later than never. Thanks.
-- Ben
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