Valuation of a company with high inventories and debtSubscribe
We are just in the middle of modelling the financial statements of a meat company, with high level of inventories (think 9 months of salesm ham company). This company has a level of debt, we suspect associated to that inventory. That debt has a cost, so when we calculate the equity value of the company via EV-Debt+Cash we come up with a value near 0.
Our question is the following, is there any adjustment to be made to these kind of companies (meat, wineries etc) carrying a high proportion of inventories on the balance sheet?
At the beginning we discussed the option of liquidating inventories and then cancel out the debt "linked" to them. However, this is an absurd given that the company is acquired on an on-going basis, not liquidation value.
Another option would be to keep that "linked" debt out of the math (think working capital adjustment), but is that fair from a valuation perspective?