Working-Capital Slide at a Plastics Manufacturer
Cedar Point Plastics requests a $2.5 million increase to its $4 million revolving line. The company reports three years of revenue growth and positive EBITDA. Summary figures in millions: 2023 revenue 16.8, COGS 13.1, AR 3.6, inventory 2.9, AP 2.1; 2024 revenue 17.9, COGS 14.3, AR 4.4, inventory 3.6, AP 2.4; 2025 revenue 18.4, COGS 15.2, AR 5.5, inventory 4.8, AP 2.6. In 2025, net income was $620,000, interest $480,000, taxes $180,000, depreciation $700,000, and capital expenditures $900,000. Operating cash flow was negative $350,000. The CFO says growth consumed cash and that a $600,000 tooling asset is included in inventory and will be billed to customers next year. The bank's borrowing base excludes tooling and advances 80% on eligible receivables and 50% on inventory. The current loan is $3.9 million, and the bank requires a fixed-charge coverage ratio of 1.20x. The company is asking for relief.
1. Calculate DSO, inventory days, payable days, and the cash conversion cycle for 2023 and 2025. Interpret the trend.
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DSO = AR/revenue × 365; DIO = inventory/COGS × 365; DPO = AP/COGS × 365; CCC = DSO + DIO − DPO. 2023: DSO 3.6/16.8×365 = 78.2; DIO 2.9/13.1×365 = 80.8; DPO 2.1/13.1×365 = 58.5; CCC = 100.5 days. 2025: DSO 5.5/18.4×365 = 109.1; DIO 4.8/15.2×365 = 115.3; DPO 2.6/15.2×365 = 62.4; CCC = 162.0 days. The CCC lengthened by 61.5 days. At 2025 revenue of about $50,400 per day, that is roughly $3.1 million of additional cash tied up relative to the 2023 cycle, although the exact dollar effect should use cost-based balances. The trend shows growth is being financed by receivables and inventory, not by supplier terms.
2. Assess the quality of earnings and cash flow. Is reported EBITDA a reliable indicator of debt capacity? Show adjustments.
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Reported EBITDA = $620k + $480k + $180k + $700k = $1.98 million. But operating cash flow was −$350k and capex was $900k, so free cash flow was about −$1.25 million. The EBITDA is not a reliable debt-capacity measure without working-capital adjustment. The cash drain is explained largely by AR rising $1.1 million and inventory rising $1.2 million, partly offset by AP rising $0.2 million. The $600k tooling asset inside inventory is especially important: if it is not billable or is recoverable only over several years, it should be excluded from the borrowing base and possibly expensed. A lender should use adjusted EBITDA, deduct capex and cash taxes, and stress-test the fixed-charge coverage ratio. On the presented numbers, the company is growing insolvently unless the CCC is reversed.
3. Recommend a credit response: approve, decline, or approve with conditions. Include borrowing-base, covenant, and monitoring terms.
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Approve only a conditioned, monitored facility, not a clean $2.5 million increase. Conditions: exclude tooling from eligible inventory; reduce the inventory advance rate or set a sublimit; require weekly borrowing base certificates and 13-week cash-flow forecasts; impose minimum excess availability of $500k; require a fixed-charge coverage covenant tested quarterly with cash dominion if availability falls below a trigger; require a credible plan to reduce CCC to 130 days within two quarters; and prohibit dividends or related-party payments. Consider a $1.0–1.5 million increase, not $2.5 million, with a springing maturity. If the company will not provide tooling support, customer billing evidence, and a written working-capital plan, decline. The credit decision should be based on cash conversion, not EBITDA.