In this workout, we're gonna have a look at LVMH and we're gonna have a look at some of its numbers and other information to build up an idea of what a credit analyst would do with this sort of information. If we first take a look at the information that's been given to us, you can see that there's an introduction where LVMH is introduced. It's a luxury goods company and it has lots of products which you are probably quite familiar with, such as Louis Vuitton and Moet. Now this sort of information would be a big input into the business type risks. What country is it operating in? France. How stable is that country? How concentrated are they in their segments? Who are they serving? What sort of industry are they in? And you'd probably wanna know about the competitors as well. As we move down, you can see that things get more financial in nature, and this is what we're going to be concentrating on chiefly in these set of workouts. You can see that a data provider has been quizzed and we have some information, we have some results from the accounts. And you can see it breaks down into cashflow-based information on the left and P&L-based information on the right. And you can see that they're quite variable. There's obviously been some impact of the pandemic on this company.

And then down here we've got the credit analyst has prepared for us some extracts. And for very observant amongst you, you might notice that the numbers here are slightly different. So if we were to look at EBITDA, you'd see here we've got 26, 27 million or even billion. And then over here if we look at EBITDA and it is billion, you could see that it's significantly lower. And that's because the analyst has done an element of cleaning here. So you'll see that this is the information from the income statement, it's as reported, and this is the information that's been adjusted for maybe things like one-offs. Okay, if we take a look at the adjusted then, and this is the information we'll be using chiefly from now on, you can see it looks a bit like a P&L except it gets through to cash quite quickly. And then you've got all sorts of labels as to what sorts of cash you're looking at. And it is worth just going through these briefly and just think about their meaning before we dive into the workouts. So you can see first off, we're going through the P&L and then we get to a kind of cash-based P&L, the funds from operation. We're still talking about operations, but now we bring in some balance sheet stuff and we say, you can't really run the business from an operating perspective without investing in working capital. Having done that, you get your operating cashflow. You could use the same logic and say, well, you can't really run the business without trying to expand it, and to expand it, you're gonna need to invest in some machines or other long-term assets. And so via the CapEx, we get our free operating cashflow. Free cashflow would be familiar to lots of you and you might be surprised to see dividends in here with a strange one attached, so let's get rid of that. And you can see they're deducting dividends. And the reason is that you might see dividends as non-discretionary. And what I mean by that is it's not really optional. If you were to cut that dividend, it would send a very poor signal to the market. And so credit analysts would put the dividends paid in and then say anything after that is discretionary. So for example, from that 6 billion that's left, you could buy other companies, you could do other things like that. Okay, so having had a tour through the information and chiefly through this kind of tour through all of the cash flows that you might see in credit analysis, let's dive into the workouts. The first thing we're gonna look at is interest cover. And remember, we're gonna use EBITDA as a proxy for cash cashflow. And so let's find the EBITDA. So let's go up and we'll grab the adjusted EBITDA. We're gonna use these figures, not the ones above from the data provider. And then we're gonna relate it to the interest expense. And you can see the interest expense was the next line. Now I'm gonna add a times minus one there just to make it into a positive figure.

We're then gonna relate those two to each other and we've just gotta do it the right way round. So it's the interest cover, it's the ability of the EBITDA to cover the interest. And you can see that's a very, very generous interest cover. LVMH is able to cover its interest with its EBITDA over 85 times. And so from a credit analysis point of view, that'd be a high level of comfort. Next, we're gonna have a look at the relationship of funds from operation, so that was the kind of pure income statement but version of cash, and relate it to the total debt. Let's go fetch the funds from operation. And you can see the funds from operation is above changes of OWC. So it's saying what comes from the income statement but in cash terms.

Now that's just over 20 billion. And if we relate that to total debt, you can see that FFO divided by total debt, that's 83%. And if we think about the meaning of that for a minute, you could say your funds from operation will be able to repay the total debt to a tune of about 83% within a year. It's not that realistic though, is it? Because remember, there are other parts of the business which will need to be serviced after FFO to keep the business working. And chiefly among those are your investment in working capital and your capital expenditure. And so, although this one's interesting, we would immediately go on and do the same thing but relate it to FOCF. And remember, that's your free operating cash flow. So let's go find the free operating cash flow.

That's over here. And you can see it is much reduced from the 20 billion before, it's more like 13 now. And that's because you've had to spend about 7 billion on maintaining your working capital, growing your working capital, and buying machines and other long-term assets. Now if we relate that to, it says total debt there, we can just pinch that from over here. Okay, we were given the total debt, I'll just use it again. And so if we relate them to each other, you can see that actually, once we take into account growing the working capital, growing the CapEx, the long-term assets of the company, that relationship is more like 50%. And so it would take more like two years to repay debt from free operating cash flows. Now, if we go even further down in terms of cash flows, we could take the discretionary cash flow. Okay, so if we grab the discretionary cash flow, so we go up, DCF, not to be confused with discounts cashflow, this is discretionary cash flow, this is credit analysis, and you can see this much reduced again. And that's because we've had to pay out just shy of 7 billion to our equity holders as dividends. And if we relate that to the total debt and we say we've had to pay out our dividends, we've had to pay out our CapEx, we've had to pay out our working capital, now the relationship is much more modest, 24%. And so the idea behind that would be that it would take closer to four years to repay all of that debt from the cash flows once you've serviced all of the critical parts of the business.