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Ratio and Benchmark Analysis

As stated previously, operating ratios, financial ratios, performance indicators, and benchmarks can be
used to measure important company attributes such as liquidity, profitability, leverage, and growth. fn 52
As such, they can be used to highlight trends and allow for comparisons with industry peers. Such a
comparison is important when assessing whether or not a debtor has unreasonably small capital. Infor-
mation on industry peers can be obtained from sources such as the Risk Management Association’s An-
nual Statement Studies, Integra’s 5-Year Industry Data Reports, Dun and Bradstreet’s Industry Norms
and Key Business Ratios, and CCH’s Almanac of Business and Industrial Financial Ratios. If available,
debtor ratios can also be compared to ratios of publicly traded companies determined to be reasonably
comparable to the debtor.

Factors for Consideration When Assessing the Adequacy of Capital

The practitioner should offer an examination of various financial metrics when assessing the adequacy
of a debtor’s capital. Such metrics should include, but should not be limited to, an assessment of whether
the debtor had, or expected to have, sufficient cash flow and whether the debtor had access to credit or
new equity to conduct its business. In addition, the assessment should take into consideration, among
other things, whether the debtor was contemplating an expansion of the business or expected to just con-
tinue the business on its current scale. When addressing the nature and relevancy of cash flow projec-
tions in the context of a capital adequacy assessment, the Moody court explained

Because [a debtor’s cash flow] projections tend to be optimistic, their reasonableness must be
tested by an objective standard anchored in the company’s actual performance. Among the rele-
vant data are cash flow, net sales, gross profit margins, and net profits and losses. However, reli-
ance on historical data alone is not enough. To a degree, parties must also account for difficulties
that are likely to arise, including interest rate fluctuations and general economic downturns, and
otherwise incorporate some margin for error. fn 53

The following is a list of factors considered by various courts when assessing the reasonableness or ade-
quacy of a debtor’s capital:

 Substantial operating losses (In re Suburban Motor Freight, Inc.; Doctors Hospital)

 Inability to meet current financial obligations (In re Suburban Motor Freight, Inc.)

 Deteriorating banking relationships (In re Suburban Motor Freight, Inc.)

 Industry-wide competition (In re Suburban Motor Freight, Inc.)

 A company’s debt to equity ratio (Norstan Apparel Shops)

transfer"); N.Y. Credit Men’s Adjustment Bureau v. Adler, 2 B.R. 752, 756 (S.D. N.Y. 1980); In re Norstan Apparel Shops, 367 B.R.
at 79 (sufficiency of working capital examined within reasonable time after the transaction).

fn 52 See AICPA Practice Aid 06-3, Analyzing Financial Ratios.

fn 53 See Moody, 971 F.2d at 1073.

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