Derivatives and Net debt calculation
Hii everyone, I am currently working on a valuation study case and I have doubt regarding the net debt calculation. On the company's balance sheet it shows financials derivatives both assets and liabilities, these derivatives are mainly hedge positions on currency, rates if I look at notes.
my question is, should I take into account these financials derivatives in a net debt calculation ?
Thank you by advance :)
In terms of valuation, you are trying to separate core from none core securities for operating the business In terms of liabilities: you only add debts that provides the company funding both in the long and short term I.E capital lease, unfunded pension,debts etc. When another company is about to acquire your target ,the acquirer would have to fulfill these obligation. On the asset side: for your derivatives. check if they cancel out. if they do ignore them. If not maybe you want to use market value of theses positions and subtract them out. We are subtracting them because they are not part of the core business . i.e they are ancillary. If you can't find market value use book.Since this is a case study, your answer just have be logical. If the amount is large, you might want to sensitize you EV with different variable just to check the logic.
Hope this helps.
Thank you for your quick answer :)
So if I get it : (let's take a quick example)
Assets : --Curent-- = 175 Equity investment :150 Derivatives :25 --Non current-- =210 Cash and equivalents : 200 Derivatives : 10
Liabilities : --Curent-- = 1300 Long-term Debt: 1200 Derivatives: 100 --Non current-- = 280 Short-term debt: 250 Derivatives: 30
So my net debt would be (1200+250-150-200) = 1100 or (1200+100+250+30-150-25-200-10) = 1195 ?
I understand that these derivatives are non core business, but they are used to hedge Working Capital (currency) and Debt (rate and currency)
This is where I am a bit confused actually ^^'
Maybe I am going too far in my logic but my purpose of it is to use an accurate Net Debt (using book value only it's easier) to calculate EV and EBIT(or EBITDA) to Net Debt ratio
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