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Interest cover and possibly other questions about company valuation parameters

Analysing companies' finances and value from their financial statements using ratios and formulae
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Re: Interest cover and possibly other questions about company valuation parameters

#143968

Postby Charlottesquare » June 5th, 2018, 6:28 pm

Melanie wrote:
When people say:
Charlottesquare wrote:like property companies.

Do they mean firms like British Land, or do they just mean retailers, i.e. lots of property owning/leasing for their business.

many thanks
Matt


I tend to mean any business with lots of debt secured against assets, especially if debt is being amortised. If company has a covenant to repay over ten years the fact it has interest cover of say 2 is not much help when the actual loan repayments it must make is as great as the reported profits, debt capital repayments, short of borrowing more money, have to be repaid from post tax profits or asset disposals.

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Re: Interest cover and possibly other questions about company valuation parameters

#144057

Postby Gengulphus » June 6th, 2018, 8:51 am

Melanie wrote:
Gengulphus wrote:But a useful technique is simply to search the report for the word "debt".

Of course. Typical of me to miss the obvious. Though having said that there is so much fluff in a lot of the reports that it's easy to overlook. Thanks for the simple tip!

One supplementary tip I'll add to that: if you don't find much about "debt", do a search for "borrowings" - it's an alternative term that some companies use.

Melanie wrote:
Gengulphus wrote:In Domino's case, they don't give a calculation but do give a "net debt" figure of £89.2m. The two "Financial liabilities" items minus "Cash and cash equivalents" total £152.3m+£6.2m-£29.0m = £129.5m. That's a big difference, which I would investigate - and on investigating note 24 about the "Financial liabilities", I find they include two items called "Gross put option liabilities" that total £34.7m+£5.6m = £40.3m and don't look as if interest is accruing on them. Excluding them reduces the £129.5m from my calculation to £129.5m-£40.3m = £89.2m, and the equivalent calculation on the 2016 comparatives gives their comparative "net debt" figure of £34.6m, so I think I've probably worked out what Domino's calculation was!

Well done and thanks. Us newbies actually had to look up "put option" to figure out what it all meant. ...

To be honest, I didn't know very much about what it all meant either. Basically, just that an "option" is a contractual agreement that at some time (or range of times) in the future, one party can insist that the other either sells them shares at a specific price or buys shares from them at a specific price, depending on its type ("put" or "call"). I didn't even know offhand which type was which - it's easy enough to work out from the meanings of the two English words, but I've never dealt with options other than employee share options and that's just a matter of being granted them and exercising them when possible if one wants to, so which type is which hasn't become 'working knowledge' and I do have to think it out each time on each (rare) occasion that I need to know...

This wasn't such an occasion, though: just knowing what an "option" is was enough to tell me that it was very likely that interest isn't accruing on the liability, making it not count as "debt". That's not quite certainty, though, so I summed my thoughts up as "don't look as if interest is accruing on them" rather than "interest is not accruing on them". In research for an investment I was considering for myself, I would do the same apart from noting it as a point to double-check if (and only if) significant discrepancies showed up later; as it was, it was only research for a post and it resolved a discrepancy rather than creating one, so I didn't even think of looking any further into the question!

Gengulphus

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Re: Interest cover and possibly other questions about company valuation parameters

#144068

Postby Dod101 » June 6th, 2018, 9:33 am

I am not an accountant but I have had to know a bit about accounts in my management job and have found it very useful outside of work. I am also very interested in Charlotte Square's comments. From the way this discussion is going, we can all see that there is nothing black or white about accounts and getting down to the detail like this will not I think make many of us better investors. I suspect that there are better ways.

Published accounts of the companies we are all interested in are getting further and further away from reality and even charities are now getting caught up. I am involved with a small charity which has a loan outstanding, repayable over a period of 10 years I think it is. We are required to show the Present Value of the debt in the charity accounts. For anyone who may not understand what this means, it is that instead of showing the actual amount of the debt, that amount is discounted back to the accounting date so that it is shown at about half of the actual amount. This is stuff and nonsense and helps no one but is apparently required under SORP (Statement of Recommended Practice). The result is that the full amount of the loan has disappeared from the accounts.

Dod

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Re: Interest cover and possibly other questions about company valuation parameters

#144117

Postby TheMotorcycleBoy » June 6th, 2018, 1:13 pm

Dod101 wrote:I am not an accountant but I have had to know a bit about accounts in my management job and have found it very useful outside of work. I am also very interested in Charlotte Square's comments. From the way this discussion is going, we can all see that there is nothing black or white about accounts and getting down to the detail like this will not I think make many of us better investors. I suspect that there are better ways.

I agree with this Dod. I certainly don't want to spend any more time than I have to (although it's certainly good background to have).

The main reason I posted this topic, is because I'm (slowly) putting together a simple spreadsheet which we can enter a "few" figures gleaned from ARs, in order to, in addition to "soft skills" value the worthiness of a firm. I appreciate that we can subscribe to online providers for this (but we don't currently wish to pay for that service), and I know that there exist a cross section of freebie sites (4-traders etc.) where some usually reasonable approximations are published. (We obviously plan on comparing our figures with one or two of these freebies).

And after figuring out FCF, operating margins, ROCE, capex ratios etc.etc. I am left with creating a few lines summarising "any" firm's debt-related vulnerabilties which brings me back to my current goal of meaningful entries for some parameters which Phil Oakley mentions in his "How to pick quality shares" book, under the summary of how to avoid debt-ridden companies:

1. Debt to Net op. cash flow less than 3 times
2. Debt to FCF less than 10 times
3. Debt to total assets less than 50%
4. Int. cover more than 5 times
5. Fixed charge cover more than 2 times


I believe when Phil says debt he means gross debt (I'm not 100% sure what exact asset measurement he is using). I'll double check this later on with the book and this link, which I've just managed to google, from Phil Oakley himself:

https://www.sharescope.co.uk/philoakley_article123.jsp

Matt

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Re: Interest cover and possibly other questions about company valuation parameters

#144162

Postby Dod101 » June 6th, 2018, 3:47 pm

Hi Matt

I am not being in the least critical and I think it is great that you have the stamina to keep going! There is no doubt that it is tremendously useful to have at least some understanding of the principles behind company accounts even if some of the detail eludes me at least. My comments are just intended to bring us all back to the practicalities and what it is we are trying to achieve, familiarity with the means of assessing companies.

Personally I find it very interesting and thanks to you for raising this stuff in some detail.

Dod

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Re: Interest cover and possibly other questions about company valuation parameters

#144205

Postby TheMotorcycleBoy » June 6th, 2018, 7:48 pm

Been chugging through my base spreadsheet, which I'd like to eventually apply all "any" firm I research. Ok, ok, I appreciate all firms and their reports have their differences. But regardless, I've now done the Gross Debt/Total assets, using guidelines to only include interest-attracting liabilities in my "debt" sum. (Should be easy to add another cell with using net debt instead).

And now I'm reading about another debt ratio (debt to equity) from mostly here https://www.accountingformanagement.org ... ity-ratio/

and some confusing "guidance" as to it's interpretation:

Creditors usually like a low debt to equity ratio because a low ratio (less than 1) is the indication of greater protection to their money. But stockholders like to get benefit from the funds provided by the creditors therefore they would like a high debt to equity ratio.

Debt equity ratio vary from industry to industry. Different norms have been developed for different industries. A ratio that is ideal for one industry may be worrisome for another industry. A ratio of 1 : 1 is normally considered satisfactory for most of the companies.


Opinions? Is this one really worth us bothering about?

thanks M&M

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Re: Interest cover and possibly other questions about company valuation parameters

#144355

Postby TheMotorcycleBoy » June 7th, 2018, 7:38 pm

Hello everyone,

This time I've been looking at a different AR, that of Next PLC for 2014-2015.

http://www.nextplc.co.uk/~/media/Files/ ... al-web.pdf

I'm trying to learn more about how interest is stated in annual reports, and why it is being stated different in different sections of the report. In the "Income statement" on page 80, I can see:

Financial income       [5]      0.8
Financial costs [5] (30.7)


I followed Note. 5, and

5.  Finance income and costs
-------------------------------------
Interest on bank deposits 0.7
Other interest receivable 0.1
Total finance income 0.8

Interest on bonds and other borrowings (30.6)
Other fair value movements (0.1)
Total finance cost (30.7)
-----------------------------------------------------


So in my opinion it looks as it Next are accounting for -29.9 re. interest paid.

However in the "Cash flow statement"

Interest paid (29.7)
Interest received 0.9


here -28.8 of interest paid.

So whilst I appreciate that it a small difference (in the scale of other figures in the report), I'm still curious as to where £1.1M has managed to hide itself!

Matt

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Re: Interest cover and possibly other questions about company valuation parameters

#144677

Postby Gengulphus » June 9th, 2018, 10:49 am

Melanie wrote:
Gengulphus wrote:In accounting terms, goodwill arises specifically on acquisitions of other companies: it is the amount paid for the acquisition minus the identifiable book value of its assets. The idea is basically that the acquirer have paid a fair price for the acquisition, so if e.g. the acquirer has paid £100m for the acquisition and the assets it has have a total book value of £60m, then the fact that it has the ongoing business it does must be worth a further £40m of 'goodwill'. It's a reasonable idea in principle, but IMHO has at least two problems in practice. First, companies have rather too frequently been known to overpay for acquisitions and occasionally snap up a bargain, i.e. underpay for them. Including 'goodwill' in net asset value results in the overpaying company's net asset value being too high and the underpaying company's net asset value too low, which means that figure calculated for the overpaying company's gearing is too low and that for the underpaying company too high. Since lower gearing is better, that produces a bias in favour of companies that have overpaid for acquisitions in the past and against ones that have underpaid, which is not what I want: gearing is supposed to be a capital-based "snapshot" of the company's state on a particular date and so not to be biased by what the company has done previously....

Ok, thanks again for this. That casts this term "goodwill" in new light for me. I had a good think about this one, I think that to an extent does it not make the whole concept of "book value of (existing) assets" some what arbitrary? Myself and my colleagues are software engineers. Were our team to be acquired, indeed the acquirer could pay 100 units for us, where 60 of those are recognised as book value of PCs, books, licenses, furniture etc. and 40 of goodwill. But surely the 60 is only a useful value if the acquirer is to sell those items? Their book value, IMO, seems meaningless in the context of how much revenue it can generate in the future without having any of those tangible/intangible items renewed.

Yes, but book value is somewhat arbitrary anyway. If a company owns a property that hasn't been revalued for a number of years, it may be worth considerably more than it is on the books at. If it buys a new car and depreciates it over (say) 5 years, after one year it will effectively be on the books at 80% of what it was bought for - but it's actual market value as a second-hand car will probably be a good deal less than that. If it's still got that car after 5 years and it's in good order, its book value will have completely depreciated away, but it will still have some value, either in use or on the second-hand market. Etc, etc, etc - virtually all assets' book values are somewhat arbitrary.

Faced with that situation, an investor basically has three realistic options: ignore book value as a complete fiction, accept it as probably averaging out reasonably overall, or do a more detailed breakdown themselves. Plus various hybrids, such as choosing different options for different companies. For instance, there are smallcap investors who watch out for companies with a property on their books that hasn't been revalued for many years - which can make a considerable percentage difference to the value of a smallcap's fixed assets (large companies much less so, because any one property will probably be a much smaller proportion of their fixed assets). And while that's by no means the only thing I pay attention to in my smallcap investing, it is one of them: I will usually take a good look at the breakdown of a smallcap's assets when deciding whether to invest in it. Whereas with my HYP investments, I generally just accept book value as probably averaging out, with the single exception of excluding goodwill, which I regard as especially arbitrary and unlike other fixed assets, a mild negative feature of a company rather than a positive one (if it's anything, that is).

One other thing to say about that is that I don't regard book value as an indication of a company's earnings- or cash-generation capabilities. Its arbitrariness makes it not all that good an indicator of that, and there are better indicators of them in the income and cashflow statements (which isn't to say that those are necessarily all that good either, but I do think they're better). Rather, like other balance sheet items, they're indications of the company's resilience: how well it can stand up to adversity. E.g. if a company with a valuable freehold property on its books suffers a major loss due to fraud, it can raise cash comparatively cheaply from that property even if it is essential to the company's operations, e.g. by borrowing secured against the property or by entering into a sale-and-leaseback arrangement. A similar company without such a property doesn't have that option.

And while book value is still not all that good an indication of what the company could raise from the assets if need be, it's the only one we have and not entirely useless.

Melanie wrote:
Gengulphus wrote: but if it's got to have such a bias, I want it to favour companies with good past records over ones with poor past records!

Yes that's tricky. Because presumably, in terms of mercenary ruthlessness, the better/more successful acquirer will presumably have driven a harder bargain and acquired for lower price, thus less increment to asset side, hence raised his gearing measure?

Yes - or been more willing to walk away from the less good bargains, which has a more complex effect on gearing: on fixed assets, even less gets added to goodwill for acquisitions, but cash/debt doesn't get removed from/added to the balance sheet, so net debt doesn't go up. Basically, the company keeps the things that make it resilient in reserve for the best opportunities.

Gengulphus

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Re: Interest cover and possibly other questions about company valuation parameters

#144689

Postby Gengulphus » June 9th, 2018, 11:36 am

Melanie wrote:
5.  Finance income and costs
-------------------------------------
Interest on bank deposits 0.7
Other interest receivable 0.1
Total finance income 0.8

Interest on bonds and other borrowings (30.6)
Other fair value movements (0.1)
Total finance cost (30.7)
-----------------------------------------------------


So in my opinion it looks as it Next are accounting for -29.9 re. interest paid.

No, -29.9 interest accrued.

Melanie wrote:However in the "Cash flow statement"

Interest paid (29.7)
Interest received 0.9


here -28.8 of interest paid.

That is indeed interest paid.

A simplified example to illustrate what the difference is:

A company has two extant loans, both with interest charged at 5% and due to be paid at the end of each year of the loan's duration, which started at the midpoint of a past company financial year and is for an exact number of years, so will end at the midpoint of a future company year. Loan A is for £400m and has multiple years to run, while loan B is for £200m and is due to be repaid in 6 months' time, at the midpoint of the company's upcoming financial year.

During those 6 months, the company successfully negotiates another loan (loan C) to raise the £200m it needs to repay loan B, as it wants to preserve its cash and other resources for its business needs, but it does have to accept a 6% interest rate rather than 5%. Or an alternative example that leads to the same interest numbers is that it still manages to get a 5% rate, but it borrows £240m because it wants to raise an extra £40m for its business.

In due course, that upcoming year comes to an end and it publishes its accounts for the year. The income statement shows £31m of interest accrued, which is actually made up of £400m * 5% * 1 year = £20m on loan A, £200m * 5% * 0.5 years = £5m on loan B, and £200m * 6% * 0.5 years (or £240m * 5% * 0.5 years) = £6m on loan C.

But the cash flow statement shows £30m interest paid, which is actually made up of £400m * 5% = £20m paid on loan A and £200m * 5% = £10m paid on loan B, both paid midway through the year. No interest has yet been paid on loan C.

Needless to say, companies' loan structures are usually a lot more complex in real life than in that example, which gives further ways that discrepancies between interest accrued and interest paid might arise. E.g. variable interest rates might have changed after the interest payment date.

Gengulphus

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Re: Interest cover and possibly other questions about company valuation parameters

#144724

Postby TheMotorcycleBoy » June 9th, 2018, 3:41 pm

Gengulphus wrote:Etc, etc, etc - virtually all assets' book values are somewhat arbitrary.

Yup!

Gengulphus wrote:Faced with that situation, an investor basically has three realistic options: ignore book value as a complete fiction, accept it as probably averaging out reasonably overall, or do a more detailed breakdown themselves. Plus various hybrids, such as choosing different options for different companies. For instance, there are smallcap investors who watch out for companies with a property on their books that hasn't been revalued for many years - which can make a considerable percentage difference to the value of a smallcap's fixed assets (large companies much less so, because any one property will probably be a much smaller proportion of their fixed assets). And while that's by no means the only thing I pay attention to in my smallcap investing, it is one of them: I will usually take a good look at the breakdown of a smallcap's assets when deciding whether to invest in it. Whereas with my HYP investments, I generally just accept book value as probably averaging out, with the single exception of excluding goodwill, which I regard as especially arbitrary and unlike other fixed assets, a mild negative feature of a company rather than a positive one (if it's anything, that is).

One other thing to say about that is that I don't regard book value as an indication of a company's earnings- or cash-generation capabilities. Its arbitrariness makes it not all that good an indicator of that, and there are better indicators of them in the income and cashflow statements (which isn't to say that those are necessarily all that good either, but I do think they're better). Rather, like other balance sheet items, they're indications of the company's resilience: how well it can stand up to adversity. E.g. if a company with a valuable freehold property on its books suffers a major loss due to fraud, it can raise cash comparatively cheaply from that property even if it is essential to the company's operations, e.g. by borrowing secured against the property or by entering into a sale-and-leaseback arrangement. A similar company without such a property doesn't have that option.

And while book value is still not all that good an indication of what the company could raise from the assets if need be, it's the only one we have and not entirely useless.


Thank you very much for this GGP, useful stuff to know.
Matt

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Re: Interest cover and possibly other questions about company valuation parameters

#144755

Postby TheMotorcycleBoy » June 9th, 2018, 6:55 pm

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.

Correct?

(BTW Thankyou very much for spending the time formulating this example, it is very clear, and precise in the exact point being made.)

Ok, now I think that I understand the discrepancies, I return to the original questions in my mind vis-a-vis company valuation parameters. I have (currently!) two in mind which I'd like to compare/contrast/whatever in terms of where they should both derive their "interest" data point.

Firstly, I mentioned Interest cover (or net finance cost cover as you had at one time described it)

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?

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?
many thanks
Matt (and Mel)

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Re: Interest cover and possibly other questions about company valuation parameters

#144786

Postby Gengulphus » June 10th, 2018, 9:09 am

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.

Correct?

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...

Melanie wrote:
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.

Melanie wrote: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!

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Re: Interest cover and possibly other questions about company valuation parameters

#144813

Postby TheMotorcycleBoy » June 10th, 2018, 3:05 pm

Gengulphus wrote: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!

Ha ha! No problem!

Gengulphus wrote: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.

Yup - thanks again.


Gengulphus wrote: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...

Ok, again, no problem.

Gengulphus wrote: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,

Indeed. Like "it could go either way".

Gengulphus wrote: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.

Yes, I like the idea of using this to calculate FCFper-share, since in my humble opinion this is would give a nice way to calculate a dividend cover metric (yes, I appreciate there is alternative, probably more orthodox dividend cover definition).

Many thanks
Matt and Mel


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