Manufacturing: These KPIs protect against zombie companies
After insolvency figures have fallen in recent months despite the Corona crisis, experts are arguing about the question: Is the great wave of bankruptcies coming or not? Companies that have potential zombie companies in their portfolio can take precautions with a so-called zombie card.
At the end of last year, Deutsche Industriebank (IKB) warned that the risk of insolvency for companies in the manufacturing sector as a result of a renewed downturn (…) was much higher than the expected figures alone (…) would suggest. The sector has been on a downward path for several years, and the risk of insolvency has increased disproportionately. Rising transport costs and raw material prices are placing an additional burden on the industry. Under these difficult conditions, it is important for companies to keep an eye on their own credit management.
Andreas Del Re, professor of accounting and board member of the German Credit Management Association, confirms in an interview with Collenda: “Credit management is especially important in industries whose clientele operates in the crisis-ridden sector.” He cites suppliers of aircraft parts who work with airlines as an example. Regine Hilgers, product owner at Collenda, also advises vigilance: “It’s no longer enough to wait for the quarterly figures; credit managers need to monitor their customer and supplier relationships on a daily basis, especially in these difficult times.” Customer requests for permanently longer payment terms, possible deferrals or requests for installment payment plans, for example, are typical warning signals that something is amiss, she says. Applications such as the Credit Management module of Collenda’s Open Credit 4.0 software suite help to keep an eye on the customer portfolio and enable early hedging of risks through proactive action. The advantages of Open Credit 4.0:
- Numerous interfaces to external information service providers and credit insurers reduce the manual effort required
- User-friendly workflows and intelligent automated processes save time and money
- Operation in the cloud ensures scalability and flexibility
A so-called “Zombicard” can provide support. It monitors key figures that can be used to identify struggling companies in the portfolio (zombie companies are those that are only kept alive by government aid and are at high risk of insolvency). In particular, the most important customers should be kept in view here.
The weighting of a “zombie card” depends on the industry and varies from company to company. The following KPIs, which must always be considered in their entirety and with their dependencies, can be included, for example:
- Second consecutive year of losses: the annual financial statements of the customers in your portfolio naturally send important signals about the state of the company. If a company posts losses for two years in a row, this must be seen as a negative sign.
- Equity ratio: The equity ratio undoubtedly also depends on the industry. In the German SME sector, it generally ranges between 25 and 40 %. There are companies with an extremely low equity ratio (even among DAX 30 companies). Insurance companies, for example, operate with a high debt ratio. If the equity ratio is below 10%, you should generally take a closer look.
- Leverage ratio: The low-interest phase has been masking the problem of excessive debt for years. This can take its toll in the future. If the debt-equity ratio is greater than a factor of 2, this inversely means a high interest obligation and can lead to risks in the future.
- Debt repayment period: A high level of debt does not necessarily have to be problematic if it is offset by a high cash flow. However, the rule of thumb applies: The faster a company can repay its loans, the better its credit rating. As a rule, a debt repayment period of more than 11 years is considered problematic. It becomes particularly difficult if a loss is generated operationally.
- Restructuring: Since March 2019, German companies have been able to implement a restructuring solution even against the will of their creditors. If so-called pre-insolvency restructuring proceedings are already underway with one of your customers or suppliers, this is clearly a negative criterion and should be seen as a warning signal in the zombie card.
- Interest coverage ratio: The interest coverage ratio is calculated from the operating result / interest + similar expenses x 100. If this value is less than 1, this is also a negative sign.
Regine Hilgers also advises “media scrolling” of companies and sectors. Country risks should also be kept in view. Digital research can provide information about the economic condition of partners. For example, the use of short-time work is one indicator. Regine Hilgers: “A constantly changing economic environment also requires a short-term adjustment of control mechanisms.”
Note: All key figures must always be assessed in their entirety and not just considered individually. For example, two years of losses in a row can be a difficult signal, but if there is a high equity ratio and other key figures are also not bad, this does not have to lead to problems.