By Ted Reid, HBA, CA, Chief Financial Officer - Paladin Security Group Ltd.
Every once in a while, we get reminders of why it is important for security service purchasers to factor in a financial stability metric as part of the assessment of their security service providers. On June 10, 2013, United Protection Services Group Inc. (“UPS”) became officially bankrupt by operation of the Canada Bankruptcy & Insolvency Act. And in the past few weeks, Garda has announced that they issued $50 million in senior debt in the private equity market.
What are the implications of these two developments?
In the case of UPS, the chain effect of employees not being paid had a negative impact for its clients. Many former UPS clients were left scrambling to provide continuous security service, which is more than an inconvenience to the safety and security programs for the sites affected.
In the case of Garda, one needs to continually consider the effect of extensive debt financing on a firm’s financial stability. Garda is a firm that historically relies on debt financing at a relatively high level compared to other security providers. In fact, Garda has been known to push its debt level to over ten times its equity amount. For firms with high debt levels, is this viable if the era of historically low interest rates comes to an end in the coming eighteen months to two years?
So, what can security service purchasers look for in ensuring their security provider is financially stable? There are a number of financial tests that provide indications of a firm’s financial stability including the following:
Are the firm’s current assets greater than the current liabilities? If the current liabilities are greater than the current assets, then this negative working capital position may indicate that the firm is under strain to raise financing.
What is the ratio of debt to equity? Canadian banks will typically finance pre-approved clients up to 2.5 times the equity amount. Any ratio above this level would indicate debt leverage approaching the limits of what the financial markets will accept.
Is the firm profitable? While some financial losses can be explained for one-off events, consistent cumulative losses should be an indicator that the firm will struggle to remain viable over the longer term.
The next time there is the temptation to accept the lowest bid for security services, it might be worth taking one last look at the financial stability of the firm. The former clients of UPS may have wished they had done so earlier this month.
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