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Chao88

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28/02/19

05:04

Post #: 37595453
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Originally posted by madamswer: ↑

@Just_a_guy,

It's a little more complicated than that.

In this particular case, "finance costs" are really a bit of a misnomer when considered in conventional terms as notional interest on some kind of borrowings.

Based on the kind of business that this is, namely one that has to import a significant amount of its CoGS in terms of raw materials, I believe that ~$1m in finance costs will relate mostly to fees for the issuance of letters of credit (LoC's).

And it is the use of LoCs that allows Capral to run with lower levels of working capital than would otherwise be the case. For context, Capral's level of payables average in excess of $70m, and Payables-to-CoGS averages around 28% to 30%, which translates to a very meaningful proportion of the company's inputs being financed by its suppliers.
(For context, my experience is that most companies that are "similar" to Capral - i.e,. manufacturing concerns reliant on international markets for their raw materials (Australia doesn't have too many of them these days) - would have Payables-to-CoGS running in the the high teen percentages, maybe in the low 20%s)

Besides, the use of LoC's is most likely a requirement of Capral's international suppliers.

The alternative is for Capral to pay their suppliers up-front, with the attendant reduction in cash balance (i.e., reduced financial flexibility) and - more importantly - the associated counter-party risk. So LoCs are also a form of insurance for Capral.

So, yeah, it's not ideal, but it is the nature of things, to some extent.
Sort of, a cost of doing business, if you like.

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Thanks, guess it part of doing business for them although very frustrating. What a way to burn over a million dollars.

CAA Price at posting: 13.0¢ Sentiment: Buy Disclosure: Held
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