MT482 Unit 4 Liquidity and Solvency Review Example

Enough Cash, Too Little Covenant Room: An MT482 Unit 4 Liquidity and Solvency Review of a Billboard Company

[Student Name]

Purdue University Global

MT482: Financial Statement Analysis

Unit 4 Liquidity and Solvency Review

[Instructor Name]

[Date]

Wabash Outdoor, its lenders and every figure are composite; the sources cited are real.

The Question

Wabash Outdoor, the composite regional billboard operator followed through the course, depends on advertising budgets that shrink in recessions. Its lenders and shareholders want to know two things: whether it can meet its obligations as they come due, which is liquidity, and whether its debt is sustainable over time, which is solvency. This review measures both for 2025 and then tests them in a stress year.

Liquidity

Current assets of $97.83 million, mostly cash of $27.23 million and receivables of $56.74 million, stand against current liabilities of $140.2 million. The current ratio is 0.70; counting only cash and receivables, the quick ratio is 0.60. Read alone, those figures suggest the company cannot cover its short-term obligations.

That reading is misleading. Since lease accounting changed, the current portion of lease liabilities, $76.1 million of ground rent due in the next year, sits among current liabilities. Those payments are real, but they are paid from the revenue the same sites generate each month, not from a stock of current assets. Excluding them, the current ratio is 1.53. Subramanyam (2014) cautions that liquidity ratios must be read against the nature of a company's obligations, and for a site-based business, rent is an operating cost more than a short-term debt.

Receivables take about 54.5 days to collect, typical for an industry where agencies pay on sixty-day terms. Wabash also has $150 million undrawn on its revolving credit line, which matters more to day-to-day liquidity than any ratio.

Solvency

Total debt of $689 million equals 4.21 times 2025 EBITDA of $163.55 million; net of cash, 4.05 times, down from 4.76 times a year earlier as EBITDA grew and $26 million of debt was repaid. EBITDA covers interest of $44.1 million 3.71 times. Counting site rent of about $88.7 million as a fixed charge alongside interest, coverage falls to 1.90 times, because ground rent must be paid whether or not faces are sold.

The Stress Case

Outdoor advertising revenue fell sharply in past recessions, and the stress case cuts revenue 16 percent, to about $319.2 million. The key question is how much of the cost base falls with it. Only about 10.4 percent of revenue is variable cost, mainly sales commissions, agency fees and digital power; ground rent, posting crews, maintenance and overhead stay largely fixed in the short run. EBITDA therefore falls about 33.3 percent, to roughly $109.1 million, twice the percentage fall in revenue.

A 16 percent fall in revenue becomes a one-third fall in EBITDA, because ground rent does not shrink with advertising budgets.

In that year, interest coverage falls to 2.47 times and fixed-charge coverage to 1.49. Cash would still be adequate: operating cash after interest and taxes of about $60 million would cover maintenance capital spending of $14.6 million, dividends of $26.4 million and scheduled debt payments, with the revolver untouched.

The covenant is another matter, and Fridson and Alvarez (2022) stress that covenant headroom, not cash, is often what decides a borrower's fate in a downturn. Wabash's credit agreement limits net debt to 5.5 times trailing EBITDA. In the stress year, net debt to EBITDA rises to about 6.07 times, a breach. The company would not run out of money, but it would be in default under its loan agreement, letting lenders accelerate the loan or, more likely, charge fees and a higher margin for a waiver.

How Lenders Would Read the Numbers

A lender looking at these results would see a borrower whose cash is safe but whose contract is fragile. Most lenders prefer to renegotiate rather than call a loan from a company still paying its interest, so a breach would probably mean a waiver fee, a higher interest margin and tighter limits on dividends and acquisitions rather than a demand for repayment. Those costs are still real, and they would arrive in the year Wabash could least afford them. The more useful reading for management is that headroom of 1.45 turns of EBITDA today shrinks to nothing in a recession of ordinary depth.

What Wabash Could Do

Three steps would protect the covenant. Cutting the dividend in a downturn would release $26.4 million for debt repayment, reducing net debt toward the limit. Pausing digital conversions would save growth capital spending. And negotiating covenant headroom now, while results are strong, would cost less than seeking a waiver in a recession. Altman (1968) showed that ratios measuring liquidity, profitability and indebtedness together predict financial distress better than any single ratio, and Wabash's position, strong cash and thin covenant room, illustrates why one ratio is never enough.

Limits

The stress case assumes revenue falls in one year and costs cannot be cut further; management could reduce posting and overhead somewhat. The 10.4 percent variable share is estimated from the company's cost categories. And the covenant's exact definition of EBITDA, which often adds back certain items, could change the result.

References

Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The Journal of Finance, 23(4), 589-609. https://doi.org/10.1111/j.1540-6261.1968.tb00843.x

Fridson, M. S., & Alvarez, F. (2022). Financial statement analysis: A practitioner's guide (5th ed.). Wiley.

Subramanyam, K. R. (2014). Financial statement analysis (11th ed.). McGraw-Hill Education.