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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 use
by 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 agoSo 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 agoI 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.