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My understanding of Hertz was that they could model the revenue a new car / equipment could generate vs the cost of debt to buy that car/equipment and the tax b
by ChuckMcM 6y ago
My understanding of Hertz was that they could model the revenue a new car / equipment could generate vs the cost of debt to buy that car/equipment and the tax benefit of expensing that car/equipment.
As long as the net money out the bottom is positive, the more cars and things you have to rent the more money you get per unit.
It both justifies infinite borrowing (each incremental unit is cash flow positive) but creates extreme risk if your rental market dries up or pauses. Pre-pandemic that was pretty much not on anyone's radar given Hertz's position in the market.
But now you turn off the rental income and boom, those debt payments are still due and suddenly you are bleeding cash faster than you can liquidate other assets.
- texasbigdata 6y agoWorking capital management is a pretty common operational stream line technique private equity firms use post acquisition to improve returns. This is a bit esoteric but next here's the funny part. The definition of working capital is commonly (and I would argue incorrectly) current assets minus current liabilities. In the alternate definition, it goes non-cash current assets less non-debt current liabilities. Because with the alternate definition you're not incentivized to push down your cash balance artificially. This probably isn't a huge reason Hertz struggled, but having more cash on hand always helps.
- ChuckMcM 6y agoThere is speculation about whether or not Hertz will flood the market with used cars as they dump assets to manage cash flow.