Melanie wrote:Ok, I understand now. Since we are talking about precise points in time, where the points are the dates at which financial records are taken, Interest accrued is a measure of the "instantaneous" value of interest suffered by a firm at a given time. This is different to Interest paid, since that refers to the total of sums paid at differing points in time, i.e. relating to points that the loan contracts are arranged.
In other words, were a firm to always arrange loan contracts at the exact same day as it's year end, with payments coincident with the year end date, then in such a case, the firm would always be "fully paid up", at the precise time of report generation and hence interest_accrued == interest_paid on those reports.
Basically yes - "basically" because there are probably all sorts of exceptional things that could still cause a discrepancy, such as the company defaulting on the interest payment...
interest cover = EBIT / interest payable
And I recollect that you advised earlier:
Gengulphus wrote:I generally look at the Income Statement for interest cover - basically, it will contain a "profit before interest and taxation" or similarly-named subtotal, then some extra lines, then a "profit before taxation" or similarly-named subtotal, and the difference between those two subtotals would logically be the "interest".
In other words that this more conceptual notion of interest (i.e. that accrued) should be used for the calculation above, and indeed it is this accrued measure (rather than the amount actually paid) that a firm will use to subtract from Operating Profit in order to arrive at PBT. That is, use -29.9 (interest accrued from the income sheet) for this calculation?
Sort of... Yes, I would base the calculation on the income statement, but with a bit of caution. As I went on to say at the start of the next paragraph (it's in the second post of the thread for anyone wanting to look),"Properly speaking, that's not "interest cover" but what might be called "net finance costs cover", and I might want to investigate the finance income and finance costs in more detail ...
". Generally not worth doing if the finance costs and income figures are reasonably low compared with EBIT, as the interest cover will come out high in that case no matter what adjustments were made, and I probably wouldn't bother even in other cases unless something else made the interest figure look suspect, but occasionally it will seem worth looking into. Most of the time, though, one will find only minor adjustments on such an investigation - e.g. if I were to do such an investigation for Next (and I've not looked at its annual report, so am not saying whether I would or not), the only questionable item in note 5 as quoted above with regard to whether it should be counted as interest or not is "Other fair value movements". But it's only £0.1m, so only makes a difference to whether interest should be counted as -£29.9m or -£29.8m - not worth bothering about, so I would stop investigating as soon as I saw its amount, not even bothering to try to answer the question about whether it's interest or not.
And secondly FCF for equity (FCFE) i.e.
FCFE = FCFF - all borrowings paid off (e.g. bond principals + interest on bonds or with other lenders etc.)
in order to calculate a meaningful FCF per share figure. In this situation, should I use the actual value of interest paid in any such calculation (to subtract from FCFF), since this would represent the real
cash outflow that has taken place here? That is, use -28.8 (interest paid from the cash flow statement) for this calculation?
Could you confirm if I'm grasping this correctly?
No, I can't confirm it, nor indeed deny it, because I make very little use of free cash flow myself and have so the technicalities of calculating it, exactly what the different variants of it are, etc, are not part of my working investment knowledge - and at least for me, knowledge that I don't use tends to fade over time. That's basically because I've never found a calculation method I find satisfactory for it (the biggest problem being deciding whether capital expenditure is 'maintenance' capital expenditure or for company growth, but there are others). A pity, because I do like the principle behind free cash flow, i.e. that what really counts for a shareholder is cash flow that is used to enrich shareholders (whether by dividends and other cash returns to shareholders or used for company growth) or is available for future shareholder enrichment.
My immediate reaction based on that principle is that cash needed to pay interest that has accrued, but hasn't yet been paid, isn't available for future shareholder enrichment, and therefore shouldn't be used in free cash flow. That would suggest using the interest-accrued figure from the income statement rather than the interest-paid figure from the cash flow statement to me. But it doesn't seem very consistent with free cash flow being a cash flow measure rather than an earnings measure, so I regard it as a rather dubious immediate reaction, and certainly not one to present to you or anyone else as "this is how you should do it"!
By the way, "GGP" is a rather unusual abbreviation of my user name - I think you're the first one to use it in getting on for over 18 years on TMF and TLF. The one people normally use is "Geng" (*), and I think people are more likely to know quickly who you're referring to if you use it rather than "GGP". Certainly I thought "Hmm... I suppose it's an acronym I haven't encountered, or that I have but have forgotten. Must look it up." when I first encountered it!
(*) Or sometimes just "G", but I don't recommend that - it's capable of matching too many users!