{"id":1043,"date":"2024-02-17T09:04:37","date_gmt":"2024-02-17T08:04:37","guid":{"rendered":"https:\/\/creditanalyst.eu\/?p=1043"},"modified":"2024-02-17T09:04:40","modified_gmt":"2024-02-17T08:04:40","slug":"3-ways-the-interest-rates-hike-impacts-your-companys-financial-statements","status":"publish","type":"post","link":"https:\/\/kurtovicfinancial.com\/en\/3-ways-the-interest-rates-hike-impacts-your-companys-financial-statements\/","title":{"rendered":"3 ways the interest rates hike impacts your company\u2019s financial statements"},"content":{"rendered":"\n<p class=\"has-pale-cyan-blue-background-color has-background wp-block-paragraph\"><strong>1) Increased interest expenses and outflows<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">If a business is financed through debt with variable interest rates, it will see <strong>an increased interest expense in the income statement and increased cash outflows in the cash flow statement.<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This will <strong>negatively impact companies\u2019:<\/strong><\/p>\n\n\n\n<ul class=\"has-black-color has-text-color wp-block-list\"><li>Net income<\/li><li>All key cash flow metrics: FFO, operating cash flow, FOCF, FCF<\/li><li>Debt Service Cover Ratio (DSCR)<\/li><li>Interest cover ratio (ICR)<\/li><\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">In essence,<strong> it reduces companies\u2019 ability to generate cash flow and repay debt.<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This is especially challenging for highly leveraged companies and those operating in low-margin industries.<\/p>\n\n\n\n<p class=\"has-pale-cyan-blue-background-color has-background wp-block-paragraph\"><strong>2) Decreased value of long-term assets<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>The value of long-term assets like real estate, most securities, etc. will decrease<\/strong> as their future cash flows have to be discounted with higher discount rate.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>This makes refinancing more difficult and more expensive,<\/strong> especially for those companies on the borderline with their collateral coverage.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Getting the same amount of credit lines could be challenging and might require alternative solutions.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The value of some long-term assets in the balance sheet will decrease (depending on accounting policies though), such as:<\/p>\n\n\n\n<ul class=\"has-black-color has-text-color wp-block-list\"><li>Land, buildings, equipment<\/li><li>Goodwill (in case it has to be impaired)<\/li><li>Financial assets<\/li><\/ul>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>This will impact the capital structure ratios:<\/strong><\/p>\n\n\n\n<ul class=\"has-black-color has-text-color wp-block-list\"><li>Equity ratio<\/li><li>Debt-to-Capital ratio<\/li><li>Tangible Net Worth (TNW) ratio<\/li><\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">It is the main reason why we have been increasingly seeing real estate companies recording huge losses.<\/p>\n\n\n\n<p class=\"has-pale-cyan-blue-background-color has-background wp-block-paragraph\"><strong>3) Decreased demand<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Higher interest rates lead to lower disposable income, which leads to lower consumption. Further, as money is getting more expensive and demand decreases, companies reduce capital spending, and the vicious cycle continues.<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">As more companies suffer, <strong>the bad debt increases,<\/strong> which impacts mostly your:<\/p>\n\n\n\n<ul class=\"has-black-color has-text-color wp-block-list\"><li>Revenue<\/li><li>Profitability metrics: EBITDA, EBIT, net income<\/li><li>Cash flow metrics: FFO, NOCF, FOCF, FCF<\/li><\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Virtually all financial statements and metrics are impacted by decreasing demand.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">________<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The list above is not exhaustive, there are many other items which will be impacted, depending on the company\u2019s industry, business model, leverage level, etc.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">However, <strong>the common denominator is that it will impact companies\u2019 LIQUIDITY.<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Be sure that your customers have enough.<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Make sure your company has enough.<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">________<\/p>\n\n\n\n<p class=\"has-luminous-vivid-amber-background-color has-background wp-block-paragraph\"><strong>CreditAnalyst(.eu) &#8211; Company Analyses | Negotiations with Banks | Financial Planning<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>1) Increased interest expenses and outflows If a business is financed through debt with variable interest rates, it will see an increased interest expense in the<span class=\"excerpt-hellip\"> [\u2026]<\/span><\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[19,22,6],"tags":[32,59,178,30],"class_list":["post-1043","post","type-post","status-publish","format-standard","hentry","category-credit-guide-2","category-credit-insights","category-blog-en","tag-financial-statements","tag-financial-statements-analysis","tag-interest-rates","tag-leverage"],"_links":{"self":[{"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/posts\/1043","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/comments?post=1043"}],"version-history":[{"count":1,"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/posts\/1043\/revisions"}],"predecessor-version":[{"id":1044,"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/posts\/1043\/revisions\/1044"}],"wp:attachment":[{"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/media?parent=1043"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/categories?post=1043"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/tags?post=1043"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}