Past Financials Don't Always Support Debt Service

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by a searcher from Iowa State University of Science and Technology
in Leesburg, IN 46538, USA

2yrs ago

Past Financials Don't Always Support Debt Service

I'm curious how others view companies who's past financials only support the debt service post close for the past couple years. For instance I'm looking at a well water services company that has ~$800k EBITDA in 2022 & 2023, ~$500k in 2021, ~$190k in 2020, ~122k in 2019 and ~280k inredactedDebt service would run around $370k at the asking price. That works for their current performance but going back a few years it doesn't.

Normally this would be a no go for me as I prefer a business that's been steady and ready for me to improve it, but the business is the leader in their area as a complete stop for well water services, excluding interior plumbing, which would be something I'd look to add. If I move forward the key is to figure out what is different and has caused them to jump so much in a short time and if it's sustainable, but I'm just curious if others just pass over them, as I normally would, looking for a "safer" company or if they take the time to dig in.

1 Like

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reply by an investor 1yr ago
from Columbia University in Larchmont, NY, USA

I would not automatically pass. You should diligence the reasons behind the increase and determine if it’s sustainable. It might be. If it is, the older, lower cash flows shouldn’t burden you.

reply by an investor 1yr ago
in Edinburgh, Scotland, United Kingdom

Are the financials Audited for the last 3 years? Sounds like they are fattening the pig in prep for a sale. If you have the resources get a Quality of Earnings report. That will eliminate any guess work.