6 Free Financial Modeling Lessons...and More.

Enter your e-mail below to get our new Free Modeling Tutorials ($200+ Value).

< previous | next >

What counts as "debt" in an enterprise value calculation?
 

hoodinternet's picture
(Baboon, 123
 
Points)
 on 8/4/12 at 1:00am
debt enterprise value.jpg

I know every guide says "debt" is added to enterprise value, but what exactly comprises debt? Is it any long-term liability? Do short term notes count under this definition? Would a credit facility count as a "debt" in the EV calculation?

Tags:
humble_dude's picture

I think the most common types

O
(Orangutan, 357
 
Points)
 on 8/3/12 at 12:15am

I think the most common types are: long term, short term, convertible and you can view preferred as a debt-like liability too.

Not sure about credit facility, you pay a certain fee for the corresponding size of the revolver, but I think one should include the amount drawn out of the credit facility as your debt as well. I think they normally are included in current debt portion.

re-ib-ny's picture

There are two types of

PE
(Gorilla, 689
 
Points)
 on 8/3/12 at 12:21am

There are two types of liabilities: operating and financial. Debt represents any financial liability, which would encompass both notes and credit facility obligations outstanding.

What distinguishes a financial liability from an operating liability? Ask yourself how the liability got on the balance sheet. If the company owes the liability to an entity who simply gave the company cash for the purpose of earning a return on investment, then the liability is financial (one simple test people use is to ask whether the liability earns a rate of return). If, however, the obligation got there in the course of doing business, then it is operating. So, for instance, accounts payable, accrued expenses, etc. (which are owed to suppliers and trade partners, not lenders seeking a rate of return) are all operating liabilities, not debt.

Short-term notes are essentially short-term bonds sold to investors; the company gets cash and the investors earn interest. Classic debt. Credit facilities are like credit cards for corporations. A bank (or syndicate of banks) will commit to giving a company cash, up to a limit, if requested. The company pays interest on the cash it borrows, as well as a fee on the undrawn amount as consideration for the banks making the capital available. Also classic debt.

Don't forget to include preferred equity and any other fixed obligation ranking senior to the common stock as debt in your enterprise value. Also, make sure to count options (less the proceeds received on exercise), restricted stock, restricted stock units, etc., when your are calculating equity value.

thecoldburns's picture

The minimum requirement I

PE
(Baboon, 150
 
Points)
 on 8/3/12 at 1:57am

The minimum requirement I apply pertaining to debt is whether it is interest-bearing or not.

As such, if the short term notes are interest bearing, then yes. Also, I would think that it depends on the credit facility and if it is exercised upon. Not too sure about the latter though!

Cola Coca's picture

Do any of the professionals

O
(Orangutan, 321
 
Points)
 on 8/3/12 at 2:55am

Do any of the professionals here add in operating leases like Damodaran does?

Oreos's picture

Cola Coca: Do any of the

HF
(Neanderthal, 2,455
 
Points)
 on 8/3/12 at 3:37am
Cola Coca:

Do any of the professionals here add in operating leases like Damodaran does?

yes, and in addition to recourse securitized ARs

Cola Coca's picture

Oreos: Cola Coca: Do any of

O
(Orangutan, 321
 
Points)
 on 8/3/12 at 3:43am
Oreos:
Cola Coca:

Do any of the professionals here add in operating leases like Damodaran does?

yes, and in addition to recourse securitized ARs

Thanks for the info.

No experience here, so I hadn't heard of recourse securitized ARs until now. Sounds somewhat dumb, but I guess it's no different than mortgage putbacks.

Oreos's picture

Cola Coca: Oreos: Cola

HF
(Neanderthal, 2,455
 
Points)
 on 8/3/12 at 3:56am
Cola Coca:
Oreos:
Cola Coca:

Do any of the professionals here add in operating leases like Damodaran does?

yes, and in addition to recourse securitized ARs

Thanks for the info.

No experience here, so I hadn't heard of recourse securitized ARs until now. Sounds somewhat dumb, but I guess it's no different than mortgage putbacks.

basically you set up a special purpose vehicle, put all your account receivables in it, sell it at a discount to account for TVM and risk. if the claims of the buyer have recourse upon the SPV and the company, it's just like secured lending, if not, it's separate to the company and the cash received is just like any other asset sale, end of story.

Going Concern's picture

Oreos: Cola Coca: Do any of

(King Kong, 1,702
 
Points)
 on 8/3/12 at 8:30am
Oreos:
Cola Coca:

Do any of the professionals here add in operating leases like Damodaran does?

yes, and in addition to recourse securitized ARs

You can also add Pension and OPEB liabilities to total debt

And I think it's gonna be a long, long, time

Oreos's picture

Going

HF
(Neanderthal, 2,455
 
Points)
 on 8/3/12 at 10:33am
Going Concern:
Oreos:
Cola Coca:

Do any of the professionals here add in operating leases like Damodaran does?

yes, and in addition to recourse securitized ARs

You can also add Pension and OPEB liabilities to total debt

Yea, and it very much depends on how the pension trustee is viewing the deficit. If your pension is obviously being used as a form of financing (i.e. whether you've moved it from CFO to CFF by way of not paying your pension cost and in effect, borrowing against your pension) they'll look upon it less favorably. Or they'll be happy with you saying it's an operating liability going forward.

Without giving too much of an annoying answer, most contracts will have change of control provisions, how these are triggered or the extent that they need to be refi'd is tricky to generalise past "debt".

blackberry89's picture

I recommend this book for all

 
Points)
 on 8/3/12 at 11:05am

I recommend this book for all finance questions:
http://www.scoopbooks.com/

hoodinternet's picture

Thanks a lot guys. I'm

(Baboon, 123
 
Points)
 on 8/3/12 at 6:20pm

Thanks a lot guys. I'm quickly realizing that all the "simple" concepts I learned about in class and finance tutorials on the web get a lot messier when you are actually looking at balance sheets and wondering what half the items mean haha.

Ricqles's picture

good points up there. i do

O
(King Kong, 1,270
 
Points)
 on 8/4/12 at 10:33am

good points up there.

i do want to add tho that some of the times those debt are only debt if you are looking at the equity. There will be different priorities/guarantees to them so when you look at different credit investing opportunities, they will be different analyses.

Also in other industries such as glass packaging, you usually have the asbestos liability, which was created due to legal going-concern problems. I am sure some companies also have this unique line item as well

valuationGURU's picture

thecoldburns: The minimum

CF
 
Points)
 on 8/4/12 at 11:56am
thecoldburns:

The minimum requirement I apply pertaining to debt is whether it is interest-bearing or not.

As such, if the short term notes are interest bearing, then yes. Also, I would think that it depends on the credit facility and if it is exercised upon. Not too sure about the latter though!

This is correct. Interest-bearing = debt.

See my other WSO blog posts

Going Concern's picture

Ricqles: Also in other

(King Kong, 1,702
 
Points)
 on 8/4/12 at 3:22pm
Ricqles:

Also in other industries such as glass packaging, you usually have the asbestos liability, which was created due to legal going-concern problems.

Nice lingo

And I think it's gonna be a long, long, time

GoW's picture

Don't forget about the

IB
(Orangutan, 326
 
Points)
 on 8/15/12 at 10:07pm

Don't forget about the effects of underfunded pensions and ongoing leases...!

6 Free Financial Modeling Lessons...Straight to Your Inbox.

Confirm your name and e-mail below to get our best tips

Monkey Stats
Account information
We respect your Name and E-mail privacy. By joining you accept our terms of service.