By several financial metrics, private companies appear to be well positioned to take on additional debt, according to recent data from Sageworks, a financial information company. But whether they are finding willing lenders or are even willing to borrow may be another story.
Sageworks’ latest Private Company Report shows that private companies, on average, are less likely to default than they were a year ago. The average probability of default for private companies that filed annual statements between November 2012 and April 2013 was 4.1%, compared with 5.1% in the comparable year-ago period. The probability of default is the likelihood that a company will be unable to meet its financial obligations over the next 12 months. A default could include a borrower being 90 days past due on a loan, a loan being placed in a nonaccrual status, a write-down on the obligation, a troubled-debt restructuring or a bankruptcy.
“The improvement in default rates, coupled with healthy sales and profitability show that private companies may be well positioned to borrow,” said Sageworks chairman Brian Hamilton.
Interest coverage is stronger, on average, and ratios of debt to liabilities, to equity and to earnings before interest, taxes, depreciation and amortization (EBITDA) are each lower than a year earlier for private companies, on average, Sageworks data shows.
Meanwhile, private companies are posting annual sales growth of about 10% and profit margins are near 7%, according to the Private Company Report. (Net profit margin has been adjusted to exclude taxes and include owner compensation in excess of their market-rate salaries — adjustments commonly made to private-company financials in order to provide a more accurate picture of the companies’ operational performance.)
Even though commercial and industrial loans have been increasing in the U.S. as a whole, not all companies are finding financial institutions have loosened credit standards or terms.
To read the full Sageworks data release click here.