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Interest rate uptrends and business failure

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Interest rates are rising. Business size and existing debt are key survival indicators. 

debt ratios

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BEHIND THE NUMBERS: Surviving amid an interest rate uptrend by TMB Analytics

Early into the new year, much attention in the news has been focused on commentaries and projections for the Thai economy. From policymakers to private economic research houses, viewpoints seem to contain some elements of mutual agreement. The main theme can be succinctly summarised. Plainly put, this will be a year of solid growth with rising costs as a major challenge.

Cost escalation should come at no surprise given this year's ballooning commodity prices, nationwide wage increases for labourers and civil servants, and rising inflationary pressure driven by both global and domestic demand. According to the Bank of Thailand's most recent projection, headline inflation could spike up as high as 4.5%, while core inflation, a price measure that excludes energy and raw food prices, could potentially nudge up past 3%, breaking the official inflation-targeting band.

With higher inflation come higher interest rates. It is almost a sure bet that the central bank will raise the policy rate substantially further. We believe that the rate, currently at 2.25%, will move up close to 3.25% by year-end. This will eventually translate into higher borrowing costs for companies and entrepreneurs. Increases in interest expenses represent an important economy-wide issue. Unlike other cost factors such as rising material and commodity prices, this will identically affect any business that requires external financing.

Small and medium-sized enterprises (SMEs) have a lot to worry about. Managing a company's costs, particularly on interest expenses, has always been the challenge, if not the nemesis for Thai small and medium-sized entrepreneurs. Access to finance is more limited than for large enterprises. But even for those with access to finance, the inadequacy of funds and higher cost of finance make the outlook for cost management in SMEs gloomy.

Still, in the past decade, the size of SMEs in the economy continues to grow as people left salary-based employment to pursue more owner-operator roles. As of 2010, the number of SMEs reached 2.9 million, representing 99% of all companies in Thailand. They also contributed 38% to gross domestic product, compared to 45% by large enterprises.

When the sub-prime crisis hit the Thai economy at the end of 2008, it hit SMEs harder than operators in other sectors. Companies saw revenue fall sharply, and banks began to tighten lending requirements as a prudent measure. Only very large companies have access to capital markets, an alternative to bank lending, so few options were left for the majority of enterprises to roll over costs. This micro-level credit crunch, which lasted well into the early part of 2010, pushed some companies past their limits and they started closing their doors to customers.

Not all stories were tragic nonetheless. This prompts us to dig deeper and ask what the fundamental differences were between the survivors and the deceased from 2007-09. After scanning more than 8,000 SMEs survivors, we found that the debt-to-equity (D/E) ratios were much lower for surviving companies than for those that got into trouble. On average for SMEs, the D/E ratio is around 1.1. However the diversity of SMEs has generated ratios from 3.6, as we found in the animal feed sector, down to 0.7 in the beverage industry. The lesson here is just like what the US is learning: leverage is a risky thing.

In addition to the D/E ratio that reveals the leverage of companies, another key indicator that comes up on the list is the share of interest expense in the gross profit margin. Not only does this indicate the ability to pay interest by the company, it also shows the size of profit left for the company to weather unexpected storms, such as the sub-prime crisis that just hit us right on the forehead. The current average among SMEs is 10%, but again the numbers vary from 21% in the rice industry to 7% in beverages.

What about corporate enterprises, which contribute 45% to the GDP? We find this pattern strikingly persists after examining another 3,800 large companies. For instance, the D/E ratio is much higher in the companies making losses over 2007-09 than in the profitable ones. How big is the difference? About 3 to 4 times, to be exact. Of all samples, profitable companies have the D/E ratio of only around 0.73, while unprofitable ones sit on a D/E ratio of 2.7. So again, we find that companies that got into trouble tend to have high leverage - and companies that have high leverage tend to get in trouble.

Our other indicator is not that much different either. Struggling corporate companies in the furniture and household products industry face interest expenses on average of almost 70% of their gross profits, while profitable ones only shed 15% for interest payments. We find this similarity across other industries as well, such as metal and mining, where the two shares are 50% and 16% respectively, or in crops where the shares are 70% and 11.5% respectively. We also see interest payments taking more of a bite of gross profits in agricultural sectors, such as rice, rubber, animal feed and farming, than in manufacturing sectors. In other words, some companies and some industries are so swamped with interest payments that they become highly vulnerable to other risks that may catch them blindsided.

The sub-prime crisis reminded us of a very old lesson in doing business: leverage is a double-edged sword. In good times, it can bring additional growth, making return on equity alluring. But in bad times, leverage cuts the throats of companies and squeezes entrepreneurs in a credit vise. This year will undoubtedly be a year of rising interest rates. From what it seems, balancing between appropriate debt and equity to manage interest payments might just be the secret recipe to raft through another year of whitewater.

TMB Analytics is the economic analysis unit of TMB Bank. Behind the Numbers is co-authored by Dr Benjarong Suwankiri and Naris Sathapholdeja, senior analysts at the unit. They can be reached at

(Source: Bangkok Post, BEHIND THE NUMBERS, Surviving amid an interest rate uptrend, 4/02/2011, TMB Analytics, link

interest - payments made for the use of another's money for a period of time
rate - the level or speed at which something happens or changes, or the amount or number of times it happens or changes in a particular period อัตรา
interest rate - the percentage fee paid each year for borrowing an amount of money (principal)  อัตราดอกเบี้ย
trend - the direction that something is heading
uptrend - when something is increasing
commentary - a discussion (explanation, interpretation) of some event or theory (goes beyond mere description) คำวิจารณ์, คำอธิบาย, คำบรรยาย
projections - what is expected to happen in the future
private economic research houses - companies who do research for other companies as a business
viewpoints - opinions and beliefs about some issue
elements - items, pieces
contain some elements of ... - contains some ...
mutual - between two or more people, felt or done in the same way by each of two or more people ร่วมกัน
mutual agreement - an agreement between two or more people (essentially same as "agreement", redundant)
theme - the main subject of something ใจความสำคัญ, ประเด็นหลัก
succinct - expressed in a very short but clear way
summarise -
rewriting or expressing something long in a short way
succinctly summarised - summarising in a very clear and understandable way
challenge - something that needs a lot of skill, energy and determination to deal with or achieve สิ่งท้าทาย การท้าทาย

cost escalation -
when costs are increasing
ballooning - suddenly increasing by a very large amount (like air blowing up balloon)
commodity - a good that is bought in large quantities (oil, rice, wheat...etc) with every unit (kilo, liter) being the same as the other (homogenous)
ballooning commodity prices - prices of commodities suddenly increased by large amounts
nationwide - throughout a whole country ทั่วทั้งประเทศ
wage - an amount of money that you earn for working, usually according to how many hours or days you work each week or month ค่าจ้าง
civil servant - government workers (usually high job security, so work for their whole career)
pressure - a force causing change

inflation - the level of prices rising in the economy as a whole (See Wikipedia and The Economist glossary) ภาวะเงินเฟ้อ
headline inflation - 
the Consumer Price Index (See next)
Consumer Price Index (CPI) - 
a measure of the average price of consumer goods and services purchased by households (See Wikipedia)
inflationary pressure - forces at work in the economy causing the general level of prices in the economy to rise (examples: rising oil prices, increase in minimum wage, etc)
core - the most important and central part แก่น สิ่งที่สำคัญที่สุด
core inflation - consumer price inflation (CPI) excluding the prices of more volatile goods such as energy and oil and food (See Wikipedia)  การสูงขึ้นของราคาสินค้าจำเป็น เช่น น้ำมัน อาหาร พลังงาน

global - throughout the world ทั่วโลก
domestic - ในประเทศ within the country
demand - the need and desire to buy goods and services by households and businesses
projection - a calculation or guess about the future based on information that you have การคาดคะเน
spike - a sudden increase

measure - an action taken to solve a particular problem มาตรการ
energy -  any source of usable power (oil, gasoline, coal, natural gas, LPG, etc...)
raw - not cooked
raw food - uncooked food
potentially - may happen, possible in the future ที่อาจเกิดขึ้นได้
nudge up - increase by a small amount
official - approved by the government or some authority ที่เป็นทางการ

targeting - trying to achieve some goal (the target)
inflation targeting - adjusting monetary policy and interest rates upwards and downwards based on forecast inflation in order to keep future inflation within a given range (See The Economist and Wikipedia and Bank of Thailand)
monetary policy - the policy of the central bank in influencing the cost and availability of credit through interest rates and other measures, with the goals of promoting economic growth, full employment, price stability and balanced trade with other countries (See Google definitions and Wikipedia)
inflation-targeting  band - the small range that the central bank tries to keep the policy interest rate within through its monetary policy 

almost a sure bet - almost certainly, almost for sure, very very likely to happen

central bank -
the government's bank that controls all the other banks in a country, sets monetary policy, maintains the stability of the national currency and money supply, sets interest rates and inflation targets, saves failing banks as a lender of last resort during times of financial crisis (See Wikipedia)
Bank of Thailand (BOT) -
Thailand's central bank (Read description at Mahidol University)

bank - a raised area of land along the side of a river ริมฝั่งแม่น้ำ
policy - a plan of action to guide decisions and achieve outcomes (See Wikipedia) นโยบาย
eventually - at the end of a period of time or at the end of a process ในที่สุด
X translates into Y - event or situation X will lead to or cause event or situation Y
entrepreneurs - business people เจ้าของกิจการ
interest expenses - the interest paid by a business for money it has borrowed in the past
represent - to act, speak or be present officially for another person or people เป็นตัวแทน
issue - a problem that needs to be considered ประเด็น
economy-wide issue - an issue that is important for everyone in the economy (not just certain industries)
factors - one of the things that effects a situation or event ปัจจัย

enterprises - companies
Small and medium-sized enterprises (SMEs) - businesses with employees or revenue below a certain limit, for example 500 employees for a medium-sized business (See Wikipedia)
finance - providing money to expand a business, project funding จัดหาเงินทุนให้
access - the right or opportunity to have or use something ได้รับสิทธิ์หรือโอกาสในการใช้
access to finance - ability to get loans from banks (doesn't have to turn to illegal and dangerous loan sharks)
funds - money needed or available to spend on something เงินทุน
outlook - what people think will happen in the future อนาคตที่คาดไว้
gloomy - negative, unhappy, without hope

decade - a period of ten years ทศวรรษ, ระยะเวลา 10 ปี
salary - a fixed amount of money that you earn each month or year from your job เงินเดือน
employment - having a paid job
pursue - to try to achieve something ดำเนินตาม, พยายามเพื่อให้ได้มาซึ่ง
owner-operator - actually owning and operating a business, instead of only working for a business as an employee
role -
the purpose, function or influence of a person in a situation, activitty or job  บทบาท

GDP, Gross Domestic product - a measure of economic activity in a country, the value of the country's output of goods and services. GDP is defined roughly as: GDP = Household Consumption + Business Investment + Change in Inventories  + (Government Spending - Taxes)  + (Exports - Imports) (See Economist Glossary)

prime - of the best quality ที่ดีที่สุด
sub-prime - literally: below the best quality (here: loans given to people who would not normally qualify)
crisis - an urgent, difficult or dangerous situation วิกฤต
sub-prime crisis - a sharp rise in home foreclosures which started in the United States during the fall of 2006 and became a global financial crisis during 2007 and 2008 (See Wikipedia on subprime mortgage crisis)

operators - companies doing a certain doing this business
revenue - income from business activities รายได้
lending - giving money to someone who agrees to pay it back in the future การให้ยืม
prudent - being careful and using good judgment รอบคอบ ถี่ถ้วน (See glossary)
capital - money invested in a business (See glossary)
capital markets - markets that businesses can raise money to finance and expand their businesses, includes stock and bond markets

alternative - another possible way or choice, different from the usual ways ทางเลือก
option - choice, one of many different things that someone can choose ทางเลือก
majority - more than half of the people in a group, most of the people in a group คนส่วนใหญ่
credit - money that people owe other people, total loans in an economy
roll over costs - delay paying bills (by getting a loan, because sales are low and money coming into the business is less then money going out)
credit crunch -
a period of time when it is very difficult for businesses and individuals to get loans (when banks are unwilling to loan, because the economy is moving slowly, incomes are downed and increased risk of default, insolvency and bankruptcy)
micro-level credit crunch - a period of time when it is difficult for SMEs to get loans
closing their doors to customers -
going out of business (after the business fails), end of company 

tragic - causing or involving great sadness, because someone suffers or dies
fundamental - very important and essential พื้นฐาน รากฐานที่สำคัญ
deceased - dead ซึ่งตายแล้ว
scan - read quickly to get information or a general idea of what the text says
survivor - one that still exists after many have died or disappeared ผู้ที่อยู่รอด, ผู้รอดชีวิต, ผู้ที่เหลืออยู่

debt - an amount of money that you owe หนี้
equity - the value of the owners' investment in a business, not borrowed money (debt), the value of the shares of a company's tock เงินลงทุน ที่มาจากการระดมหุ้นของหุ้นส่วน และผู้มีกรรมสิทธิ
debt-equity ratio –
(D/E ratio) indicates the relative amount of debt versus stock used to finance a company’s assets, measures how leveraged a company is (See Wikipedia)

diversity - including many different types of things or people ความหลากหลาย
diversity - has a wide range of many different types of things ความหลากหลาย
generated - created
sector - a part of the economy ภาค (ทางเศรษฐกิจหรือสังคม) (public sector = government, private sector = all businesses, household sector = families and consumers, banking sector,...) (See Wikipedia)
beverage - a drink of any type เครื่องดื่ม
leverage - using borrowed money to buy assets (higher leverage = higher percentage of borrowed money used in purchase) (See glossary)
risky - involving the possibility of danger, harm or failure เสี่ยงอันตราย

key - important คนสำคัญ
indicator - a measure or number that shows or describes a condition or situation (See glossary)
share - to have or use something at the same time as someone else ใช้ร่วมกัน
profit - money that you make from selling goods and services after all your costs have been paid กำไร
margin - the amount by which a competition or election is won
Gross profit margin - gross profit / net sales, (net sales - cost of goods sold) / net sales, a ratio that shows the profitability of a business (See Wikipedia)
share of interest expense in the gross profit margin - a "debt ratio" that measures a company's leverage and ability to pay back loans  

"earnings before interest and taxes (EBIT) is a measure of a firm's profitability that excludes interest and income tax expenses" (See Wikipedia)

weather unexpected storms - be able to survive during bad economic times (when incomes are low and many businesses fail)
current - of the present time ปัจจุบัน
vary - change
beverages - drinks (milk, fruit juice, beer) เครื่องดื่ม

contribute - to make a regular payment
persist - continue over a long period of time
pattern strikingly persists -
pattern - a series of actions or events that together show how things normally happen or are done
tend - to be likely to behave in a particular way or have a particular characteristic มักจะ

household - a group of people, often a family, who live together ครัวเรือน
shed - lose สูญเสีย
swamped - having too many problem or too much work to deal with at one time ที่มีปัญหามากเกินรับไหว
vulnerable - easily damaged or harmed ซึ่งถูกทำลายได้ง่าย ที่เปราะบาง ที่ล่อแหลมต่อการเกิดภัยภิบัติ
blindside - 1. when the side of a car or vehicle is hit in an accident, 2. an unpleasant surprise

-edged sword - has both benefits and costs
Return On Equity (ROE) -
a financial ratio that measures the rate of return on the ownership interest (shareholders' equity) of common stock owners (See Wikipedia)

alluring -
attracting, looking very good so you want to get
cuts the throats of companies - kill companies, do something that makes them fail
squeezes entrepreneurs in a credit vise - when small businesses fail because they cannot get loans
undoubtedly - certainly อย่างไม่น่าสงสัย

raft - a small light flat boat made of wood, rubber or plastic แพ เรือแพ
whitewater - the rapids of a river, the part or "stretch" of a river where the river runs fast, strong and rough (strong current)
whitewater rafting -
the outdoor activity of floating along the rough and exciting part of a river in a raft (See Wikipedia)

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