# Balance-sheet resilience

**FUND-05 · Fundamentals · Core**

**Lesson question:** Can the business finance a difficult period?

Original fictional examples; educational writing, not live market data, orders or production approval.

## By the end

- Explain the mechanism in the lesson question.
- Reproduce the worked comparison and recognize its failure case.

**Prerequisites:** FUND-01

The balance sheet identifies resources and claims at a date. Cash availability, maturity timing, covenants and contingent obligations matter alongside total leverage. A solvent-looking company can still face a liquidity problem.

The amount of cash is less useful if it is restricted or required to operate.

## Understand the mechanism

Simple net debt subtracts cash from debt, but not all cash may be usable for repayment. Interest coverage indicates earnings relative to interest, not the ability to pay a large principal maturity.

Fixed versus floating costs, refinancing access and cyclicality alter the risk even with unchanged debt totals.

## Walk through the process

Build a maturity and cash-source schedule. Stress operating cash and coverage during a downturn. Read footnotes and commitments rather than relying solely on a ratio.

Compare leverage with stability and reinvestment needs. Peak-cycle earnings can make fragile debt look comfortable.

## Evidence and decision boundary

These are original fictional teaching figures, not a company screen. Actual analysis should use primary disclosures and distinguish management's explanation from your inference. Favorable or unfavorable evidence depends on the specific business, valuation and risk; no single ratio establishes a recommendation.

## A worked example

Harbor has debt 400, cash 150, EBIT 150 and interest 20. Simple net debt is 250 and interest coverage 7.5×. Suppose 200 matures next year but only 80 cash is freely usable after operating requirements.

Refinancing still matters despite the apparently strong coverage. The chart contrasts claims and resources without assuming their timing matches.

## Calculation popup: Reproduce the financial calculation

```text
Net debt=debt−cash; coverage=EBIT/interest
```

Fictional figures; definitions and periods must match.

1. 400−150=250.

2. 150/20=7.5.

**Result:** 250 million and 7.5×.

## Graph: Balance-sheet resilience—worked comparison

**Horizontal:** Debt / cash / net debt / maturity / available cash  
**Vertical:** USD millions

Fictional data from the written example. The chart organizes the comparison; its shape is not a forecast.

Complete numerical data are embedded in `scripts/fundamentals/FUND-05.js` and displayed as an accessible table in the HTML lesson.

## What would invalidate the reading?

A low net-debt number can conceal restricted cash or a concentrated maturity. Coverage based on peak earnings can disappear when refinancing is needed.

## Check your understanding

### What are simple net debt and coverage?

**Answer:** 250 million and 7.5×.

**Why:** 400−150; 150/20.

### What is the critical failure to avoid?

**Answer:** A low net-debt number can conceal restricted cash or a concentrated maturity. Coverage based on peak earnings can disappear when refinancing is needed.

**Why:** Explain this risk before treating the example as a decision rule. A correct calculation does not guarantee a favorable market outcome. **Critical risk check.**

## Takeaway

Return to the question: Can the business finance a difficult period? State the observed facts, the assumptions and the failure condition separately.

## References and provenance

The cited references support definitions and conventions. The teaching prose, tickets and numerical scenarios are original; they are not attributed as historical market observations.

- [SEC Financial Statements Guide](https://www.sec.gov/about/reports-publications/beginners-guide-financial-statements)