How to grasp debt service from the financial statements? Is current portion long term debt a part of it?

Hi everyone. I have a question and thank you for your answer in advance. I have to calculate the debt service (to calculate debt service coverage and so forth) but I am not sure whether it includes the current portion of long term debt. I consider current portion of long term debt as the principal that you need to payoff every year and thus included in the ds. Is it right? If not, why?

Besides, to calculate free cash flow, I am asked to use operating net income + d&a + capital contribution - capex - debt service to get the result. And they said the debt service only includes interest. I am very confused about the fcf, what does it mean? Even if we can suppose net income + d&a shows the level of operating cash flow capex is the investing cash flow, what does the debt service mean? Why it only includes interest here?

 
Best Response

Details about a company's debt will be in the notes as part of the filings (usually around note 8 or 9, but it varies per company). You'll see how the debt is distributed in the balance sheet.

FCF is a fancy way of saying cash the business generates after all of its immediate obligations to external parties (i.e. taxes to government, interest to banks / investors). This measure gives you an idea of how much additional obligations the company can take on, especially when PE funds think about levering the businesses to earn a higher return.

Now, the main question seems to be revolving around what debt service means. I'm not sure what operating net income means, but the formula should be the following (starting from net income): NI + D&A + Change in NWC - CapEx. With Net Income, you've already taken account of interest (and taxes). With Change in Net Working Capital, you've taken account the short term debt. Remember, balance sheet is only a snapshot of the finances, so you have to look at the changes in order to understand how much money has been gone to paying short term debt (along with everything else).

TL;DR The principal amount paid might be hidden in the Change in NWC.

--Death, lighter than a feather; duty, heavier than a mountain
 

Thank you for your answer. I researched on the debt maturity table, and it only shows bond (no short term loan) schedule from next fiscal year (FY2014) so I would suppose it is only a part of debt service. And currently I want to calculate the debt service for FY2013. I have "interest for bond and line of credit" "interest income from cash & investments" on income statement, and "current portion of long term debt" on balance sheet, and I am not sure how to use these to get the debt service? which of these three should I include in debt service calculation? I understand that principal amount paid might be hidden in the Change in NWC. But if I need to include exact principal amount in debt service calculation, how can I get it?

As for the FCF, I suppose it should be "minus" change in nwc? Sorry the "operating net income" should be "operating net revenue". They used "operating revenue-operating expense+recurring non-operating revenue" to get the operating net revenue and then eliminate tax effect. So I think it is why they use this to minus interest to get NI you have here. For the Net working capital, I did not see this part in our formula (operating net revenue + d&a + capital contribution - capex - debt service). That's why I am confused why we only take into consideration the interest but ignore the principal in this formula. And for the capex, we use only "construction and acquisition" in the cash flow statement. Do you think there are other items we need to see? Thanks

 

Yes, they provide schedule from the next fiscal year. But if you need to calculate the debt service for the previous fiscal year, what would you include? Both principal and interest? Even if you can find interest on the income statements (would you use only "interest paid" or "interest paid + interest income" to get the interest part in debt service calculation?), what about the principal? where can you find it?

 

I've seen CPLTD used, but if the company has term debt you should be able to find the credit agreement. That will have contractual amortization. CPLTD can include a bunch of other things that could ramp the number up.

 

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