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I don’t know anything about Twitter’s books but Loan payments in excess of profits doesn’t mean you’re insolvent. It doesn’t even mean you’re losing money. You

I don’t know anything about Twitter’s books but Loan payments in excess of profits doesn’t mean you’re insolvent. It doesn’t even mean you’re losing money. You can be gaining money each year while paying more in loans than you take home in profit.

amalcon 4y ago
The key thing here is that the loan payments are new, and are greater than profits were before the loan payments. That doesn't necessarily mean they are losing money -- revenue could have increased, or costs decreased, to make up the difference. Losing money also wouldn't mean they're insolvent -- that only happens once liabilities exceed assets. Still, it's definitely a signal that creditors will take note of. Good luck renting an apartment as an individual with books that look like that.
- oneoff786 4y ago
  Ehhh… loans are of course an important part of the books, as is profit, but I would hold that profit/loan payments is an obscure and unhelpful metric that a competent analyst is unlikely to utilize.
  - Macha 4y ago
    Hmm, if you had net profit of X, and suddenly have a new expense of N * X, where N is greater than 2, I think that's worth taking note of, be it low payments, a lawsuit settlement, or otherwise.
    - oneoff786 4y ago
      It’s really not though. This comparison is just a bad way to think about things. We have plenty of well established financial ratios that tell you something useful about an org. This is not one of them. Interest expense hits net income. Actual debt payments do not. The ratio is out of whack if you didn’t make a profit last year or had a tiny profit. What are we actually trying to identify here? Insolvency? Leverage? Long term Credit risk? If you tried to present this as evidence for anything you’d get kicked out the door by someone who knows what they’re doing. Maybe they took on a ton of new debt. That is interesting! But the way you explore the salience of that fact is not by comparing the next year’s debt payment to the last year’s net income…
      - Volundr 4y ago
        So how would someone who "knows what they are doing" evaluate the credit risk of Twitter given only the information available to those outside of Twitter? You keep telling us how not to do it, so what is the right way, and what does that way tell us?
        oneoff786 4y ago
        I don’t know what is and isn’t available for Twitter. I don’t really care and my lack of a precise answer here doesn’t make the given answer more useful. But generally you would look at things like the current ratio, the debt to equity ratio, the interest coverage ratio; and of course a look at what’s changing in the business landscape, what the debt will be used for, what competition is doing, etc. You could also look at the credit ratings of companies which for Twitter looks like it was recently brought down to a B- and then removed due to missing information by S&P.
  - amalcon 4y ago
    I admit that I have not done a good job of explaining what I'm driving at here, but payment shock is neither an obscure nor unhelpful concept in consumer finance. If you suddenly take on a very large, new payment, that creditor will want to see some separate evidence that you can make said payment. An income statement is one such piece of evidence, but obviously Twitter can't use that since they weren't earning enough to make the payments before. Obviously corporate finance is a very different world. Musk was obviously able to demonstrate to his new creditors' satisfaction that Twitter will be able to make these payments (I don't see evidence of an ulterior motive here). It's still a real concept. Not conclusive on its own, but it is a signal among many.

amalcon 4y ago

The key thing here is that the loan payments are new, and are greater than profits were before the loan payments. That doesn't necessarily mean they are losing money -- revenue could have increased, or costs decreased, to make up the difference. Losing money also wouldn't mean they're insolvent -- that only happens once liabilities exceed assets. Still, it's definitely a signal that creditors will take note of. Good luck renting an apartment as an individual with books that look like that.

oneoff786 4y ago
Ehhh… loans are of course an important part of the books, as is profit, but I would hold that profit/loan payments is an obscure and unhelpful metric that a competent analyst is unlikely to utilize.
- Macha 4y ago
  Hmm, if you had net profit of X, and suddenly have a new expense of N * X, where N is greater than 2, I think that's worth taking note of, be it low payments, a lawsuit settlement, or otherwise.
  - oneoff786 4y ago
    It’s really not though. This comparison is just a bad way to think about things. We have plenty of well established financial ratios that tell you something useful about an org. This is not one of them. Interest expense hits net income. Actual debt payments do not. The ratio is out of whack if you didn’t make a profit last year or had a tiny profit. What are we actually trying to identify here? Insolvency? Leverage? Long term Credit risk? If you tried to present this as evidence for anything you’d get kicked out the door by someone who knows what they’re doing. Maybe they took on a ton of new debt. That is interesting! But the way you explore the salience of that fact is not by comparing the next year’s debt payment to the last year’s net income…
    - Volundr 4y ago
      So how would someone who "knows what they are doing" evaluate the credit risk of Twitter given only the information available to those outside of Twitter? You keep telling us how not to do it, so what is the right way, and what does that way tell us?
      - oneoff786 4y ago
        I don’t know what is and isn’t available for Twitter. I don’t really care and my lack of a precise answer here doesn’t make the given answer more useful. But generally you would look at things like the current ratio, the debt to equity ratio, the interest coverage ratio; and of course a look at what’s changing in the business landscape, what the debt will be used for, what competition is doing, etc. You could also look at the credit ratings of companies which for Twitter looks like it was recently brought down to a B- and then removed due to missing information by S&P.
- amalcon 4y ago
  I admit that I have not done a good job of explaining what I'm driving at here, but payment shock is neither an obscure nor unhelpful concept in consumer finance. If you suddenly take on a very large, new payment, that creditor will want to see some separate evidence that you can make said payment. An income statement is one such piece of evidence, but obviously Twitter can't use that since they weren't earning enough to make the payments before. Obviously corporate finance is a very different world. Musk was obviously able to demonstrate to his new creditors' satisfaction that Twitter will be able to make these payments (I don't see evidence of an ulterior motive here). It's still a real concept. Not conclusive on its own, but it is a signal among many.