Question on Net Debt v.s. Adjusted Net Debt when doing WACC and DCF analysis
Hi all,
So I have been modelling one company's Net Debt, and they are giving out the cash & cash eq, std and ltd, which allowed me to get to the Net Debt. However, in their 2018 annual report disclosure, they, in addition to the net debt figure, also provides another metrics called "Adjusted Net Debt" and essentially equates to net debt + capitalized operating lease. I am just wondering when doing a capital structure analysis to estimate WACC or to work on the enterprise value -> equity value conversion, is it more common to follow the adjusted net debt approach or does the community generally exclude the impact of the capitalized operating lease? Thanks in advance for any comment.
The consensus in this forum appears to be to use total debt for WACC since net debt can be negative (hard to justify, how would you model reruns on cash?).
For the EV Equity bridge, capitalized op leases can be subtracted (refer to one of my previous posts on net debt), however, everything is up to negotiation in the end.
In addition to this, I would try to avoid any net debt figures in annual reports and only use them if you can decompose them yourself (I.e. understand them). This is a non-GAAP item and they can (more or less) do what they want.
Thanks a lot buddy it was very helpful. Can I confirm the intuition behind using net debt in WACC market value recognition is of the assumption cash can be used to reduce the debt exposure so the cost of capital in effect should be lower due to a lower debt amount i.e. net debt?
Another follow-up question, the model I am working on is an airline company so when you're saying total debt, do you refer to ST debt + LT debt + Cap. Op. Leases or just ST debt + LT debt?
Appreciate it so much.
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