Understanding Financials – Session with Our COO Rahil

Overview

A practical walkthrough on reading financial statements for credit decisions. We cover the three core statements, the ratios that matter, how to read affordability and risk, and how to combine these with Trade Shield scores. Case studies from Pick'n Pay, Shoprite, and Woolworths illustrate what to look for.

Click here to watch the video: https://youtu.be/DmCIkqMQ60g

Learning objectives

• Read and interpret the three core statements

• Use five essential ratios to assess health quickly

• Combine financial analysis with Payment Risk and Default Risk

• Apply COD and step-up limits safely when documentation is limited

Quick navigation

• Key concepts

• Essential ratios

• Affordability and risk

• Case studies

• What to do when data is limited

• FAQ

• Resources

• Knowledge check

Key concepts

The three core statements

1. Statement of financial position (balance sheet)
   Snapshot at year end. Assets = Equity + Liabilities.

   • Current assets: cash, receivables, inventory

   • Non current assets: property, plant and equipment, right of use assets, investments

2. Statement of comprehensive income (income statement)
   Performance over the year. Revenue, cost of sales, operating expenses, profit.

3. Statement of cash flows
   Cash from operating, investing, and financing activities.

Rule of thumb: Do not judge a company on one year only. Track trends year over year.

Essential ratios

Below are quick definitions and practical ranges. Always compare to industry norms and the company trend.

*Guides are contextual. Use trends and peer comparisons.

Affordability and risk

Character vs Capacity

• Character: Willingness to pay on time

• Capacity: Ability to pay based on cash generation and leverage

Trade Shield scores

• Payment Risk Score: Likelihood of paying within terms

• Default Risk Score: Likelihood of going into protracted default

Typical patterns

• High payment risk and low default risk: tendency to pay late but not default

• Low payment risk and high default risk: wants to pay but cash is tight

• Both high: late and at risk of default

• Both low: strong payer profile

Case studies

Pick n Pay

• Prior year: revenue up, large loss, weak current ratio, heavy overnight borrowings.

• Latest year: loss narrowed, current ratio improved from ~0.79 to ~1.11, borrowings reduced, non current assets lower due to consolidation and store closures.

• Takeaway: Rational consolidation can improve liquidity and trajectory before a full return to profit.

Shoprite

• Strong revenue and GP growth, profit up, investment in property, plant and equipment, bank overdraft reduced.

• Takeaway: Scale with disciplined investment sustains growth and resilience.

Woolworths

• Revenue growth with a slight drop in net profit. Current ratio dipped below 1 due to lower cash and receivables while investing in PPE.

• Takeaway: A sub-1 current ratio is not automatically distress when operations and investment signals are sound.

What to do when data is limited

• Offer confidential submission of financials to Trade Shield for a ratio-based recommendation

• If none are provided, request bank statements to assess cash discipline and estimate turnover

• Start COD or use step up limits based on observed payment behaviour

• Consider collateral where appropriate and document the rationale

• Require signed Ts and Cs or a binding contract that includes credit terms

FAQ

What is a red flag on liquidity?
A current ratio persistently below 1 with a negative trend, especially with weakening operating cash flow.

How do I think about leverage?
Watch debt to equity and interest cover together. Rising debt with falling interest cover is a concern.

What if the applicant refuses to sign Ts and Cs?
Do not extend terms. Proceed on COD or decline.

If you would like to take a short quiz, click here
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