SWM - Mark Moore

Debt/Service MarginThe third ratio in evaluating a firm’s financial leverage is the debt-to-service margin. Thedebt-to-service margin shows the ability a firm has to pay off its current portion of its long-termdebt with cash supplied from their operating activities. This ratio is “lagged”, meaning it usesnumbers from the previous year. It is calculated by dividing the cash provided from operatingactivities by the previous year’s current portion of long-term debt. The previous year’s currentlong-term debt is the “lagged” element and is used because the ratio assumes that that endingamount is the new beginning amount due the following year (the year that the ratio iscalculating). The larger the margin indicates that a firm is well off in paying its current portionof long-term debt with cash provided from its operations.Schweitzer-Mauduit 2004 2005 2006 2007 2008 1.85 0.75 1.72 4.17 2.35 Schweitzer-Mauduit Restated 2.09 0.74 0.13 0.3 0.27 Universal Corporation Alliance One Debt Service Margin 40 30 20 10 0 -10 -20 -30 -40 -50 -0.26 -1.9 0.51 28.65 0.55 -44.73 2.16 26.34 6.67 7.23 Schweitzer-Mauduit Schweitzer-Mauduit Restated Universal Corporation Alliance One The chart above shows that Schweitzer-Mauduit looks to have a steady debt-to-servicemargin. Both Universal and Alliance had negative margins in 2004 due to negative amounts intheir cash flows from operation. Alliance flew back up to a positive margin, showing that theyhad a lot more cash to repay their debt without looking for another means of payment like theydid in the previous year. For Schweitzer-Mauduit’s competitors, their debt-to-service marginshave been increasing for a year, and then decreasing the next. Furthermore, Schweitzer-135