Long term debt portion payable in a year

[TheMotorcycleBoy]

Hi,

I am learning about how to apply EPV (earnings power value) analysis in the valuation of a company and hence it's shares. I am using this book as a guide, and after the calculation of adjusted earnings, the author suggests adding to this value, the net quantity of cash and the debt payable in a year. Further into the book the author uses the firm WD-40 as an example and enters a quantity known as "Long term debt payable in a year". As I am attempting to build my own worked example using Marshalls Plc (MSLH) as a guide, I wondered if any Lemon Fools could help me in establishing this figure with their economic position in mind.

Please note that I am deriving my figures from here:
https://www.marshalls.co.uk/documents/r ... report.pdf

In the above document, obvious entries for debt can be seen in the Balance Sheet on page 74. Firstly from the Current (short term/payable within a year) Liabilities:

Interest-bearing loans and borrowings        (15)         35

and also in the Non-current Liabilities:

Interest-bearing loans and borrowings        (15)     44,107

whilst it is tempting to just use the value in the "current liabilities" section, the book I referred to above does actually mention this term "Long term debt payable in a year", and furthermore, in my opinion, if there is a sum in the LT debt which needs clearing in less than 12 months, then this should be considered in an such an EPV. (This does beg a quiet question in my mind as to why financial statements in general, the accountant does not explicitly move the year-payable portion of LT debt into Current liabilities etc.).

So to further explore this quandary I followed note 15 on page 100, where I found 2 separate entries for the bank loan comprising the long term debt, firstly within "Effective interest rates and maturity of liabilities":

*                        %   Total     6 months    6-12 months 1-2 years 2-5 years
Bank loans  Variable  1.97  43,883          –           14,500    24,239     5,144

and also "At 31 December the undiscounted outstanding contractual payments (including interest) of financial liabilities were as follows:"

*                    Carry  Total     6 months    6-12 months 1-2 years 2-5 years
Bank loans Variable 43,883 44,519          244         14,665    24,427     5,183

So given the information disclosed in the note referred to above, would I be correct to assume that 244 must be paid within the next 6 months and that 14,665 must be paid within 6-12 months?

So in conclusion, for the total debt "payable within a year", should I deduct from the cash position 35 (from the current liabilities) and 244+14665 (from the non-current liabilities)?

Matt

[Dod101]

Hi Matt

I am not going to get into a discussion on this as it has never bothered me that much, but my understanding is that debt is debt and the division of it between short term (current) and long term (repayable later than current year) is a moveable feast. Debt is usually secured at different maturities (sometimes as a bank overdraft, repayable on demand) so that the burden of repayment or refinancing is spread out over often an economic cycle. At any one accounting date, the same debt can and probably will move from long term to current as the maturity date looms closer. The theory obviously is that current debt by definition needs to be repaid or refinanced very shortly as this thus a greater potential threat to the viability of the business than if it is repayable maybe 2/3 years out.

I think therefore that the answer to your question is yes.

Dod

[Alaric]

So given the information disclosed in the note referred to above, would I be correct to assume that 244 must be paid within the next 6 months and that 14,665 must be paid within 6-12 months?

It's perhaps more relevant to a going concern at least, that the debt has to be refinanced. If a Company is struggling, the borrowings may become more expensive or withdrawn entirely.

[TheMotorcycleBoy]

So given the information disclosed in the note referred to above, would I be correct to assume that 244 must be paid within the next 6 months and that 14,665 must be paid within 6-12 months?

It's perhaps more relevant to a going concern at least, that the debt has to be refinanced. If a Company is struggling, the borrowings may become more expensive or withdrawn entirely.

Sorry Alaric,

I don't get what you mean. In the financial statement that I referred to in my OP surely the word "contractual" means that MSLH must hand over the monies I put in bold with 12 months? Thus in terms of my above EPV example these are the "Long term debt payable in a year" components?

*                    Carry  Total     6 months    6-12 months 1-2 years 2-5 years
Bank loans Variable 43,883 44,519          244         14,665    24,427     5,183

In my opinion because the EP valuation is toward a share price evaluation of a working firm, the view must be one of a going concern (as contrasted to liquidation value).

thanks Matt

[Alaric]

I don't get what you mean. In the financial statement that I referred to in my OP surely the word "contractual" means that MSLH must hand over the monies I put in bold with 12 months?

Where do you think it finds the cash? Most likely by re-borrowing or just agreeing with the original lender to roll over the loan. It's a chance for both parties to renegotiate the terms.

[TheMotorcycleBoy]

I don't get what you mean. In the financial statement that I referred to in my OP surely the word "contractual" means that MSLH must hand over the monies I put in bold with 12 months?

Where do you think it finds the cash? Most likely by re-borrowing or just agreeing with the original lender to roll over the loan. It's a chance for both parties to renegotiate the terms.

Really? In other words if the business is a healthy going concern, are you saying that despite in the financial statement I've quoted, it is possible that MSLH who back in December of 2017 make a statement to the effect of "we are obliged to pay off £15,000,000" back to our lender in the next 12 months, that half way through the year, and they can renegotiate with their lender, and actually not pay all that £££ back in their financial year as they suggested they would do earlier?

(sorry if I appear abrupt, but I'm very new to figuring out how this stuff works )

[Alaric]

In other words if the business is a healthy going concern, are you saying that despite in the financial statement I've quoted, it is possible that MSLH who back in December of 2017 make a statement to the effect of "we are obliged to pay off £15,000,000" back to our lender in the next 12 months, that half way through the year, and they can renegotiate with their lender, and actually not pay all that £££ back in their financial year as they suggested they would do earlier?)

Of course. They could equally have financed their business with share capital. It's an accounting analysis you are looking at, not a statement of predicted cash flows.

[TheMotorcycleBoy]

In other words if the business is a healthy going concern, are you saying that despite in the financial statement I've quoted, it is possible that MSLH who back in December of 2017 make a statement to the effect of "we are obliged to pay off £15,000,000" back to our lender in the next 12 months, that half way through the year, and they can renegotiate with their lender, and actually not pay all that £££ back in their financial year as they suggested they would do earlier?)

Of course. They could equally have financed their business with share capital. It's an accounting analysis you are looking at, not a statement of predicted cash flows.

Yeah, fair enough. I guess it's the word contractual which led me to believe that these monies should be considered as needing to be paid back within the stated time frame.

But regardless, back to my original question. So I am doing an EPV valuation on MSLH. I have worked out an "adjusted net earnings" for the year end 2017 (and referring to 4 years previous accounts for averaging etc.) of £43,896K, and the guidelines in my books then say, add back any net cash (i.e. free cash, plus consideration of short term) so from this report.

Current assets
...
Cash 19,845
...
Current liabilities
...
Interest-bearing loans and borrowings 35
...
...
Long term debt contractually owned within first 12 months = 244 + 14,665

So I'm thinking in absence of any other knowledge/conjecture regarding refinancing, then the cash/debt adjustment I need to be making is

19,845 - (35 + 244 + 14,665) = 4901

Sound about right?

thanks Matt

[snagga]

...(This does beg a quiet question in my mind as to why financial statements in general, the accountant does not explicitly move the year-payable portion of LT debt into Current liabilities etc.).

So to further explore this quandary I followed note 15 on page 100, where I found 2 separate entries for the bank loan comprising the long term debt, firstly within "Effective interest rates and maturity of liabilities":

*                        %   Total     6 months    6-12 months 1-2 years 2-5 years
Bank loans  Variable  1.97  43,883          –           14,500    24,239     5,144

and also "At 31 December the undiscounted outstanding contractual payments (including interest) of financial liabilities were as follows:"

*                    Carry  Total     6 months    6-12 months 1-2 years 2-5 years
Bank loans Variable 43,883 44,519          244         14,665    24,427     5,183

So given the information disclosed in the note referred to above, would I be correct to assume that 244 must be paid within the next 6 months and that 14,665 must be paid within 6-12 months?

So in conclusion, for the total debt "payable within a year", should I deduct from the cash position 35 (from the current liabilities) and 244+14665 (from the non-current liabilities)?

Matt

The current (ie. repayable within 12 months) portion of long-term debt should be presented within current liabilities, not non-current liabilities.

If you read the disclosure on page 101 it says that the bank loans are drawn down under a revolving facility with a maturity stretching out to 2022. It is possible that the loans that mature within 12 months are not shown as current because Marshalls can rollover that portion of the debt that matures into a replacement loan(s) under the same facility rather than having to pay cash at that time from its own resources.

PS: What is presented as current usually excludes interest that will accrue - and have to be paid - during the next 12 months.

[TheMotorcycleBoy]

The current (ie. repayable within 12 months) portion of long-term debt should be presented within current liabilities, not non-current liabilities.

That's what I would have thought. Anyway the book (which is very good!) that I've been reading about EPV, has a worked example using WD-40 and there subtracting "the portion of LT debt payable in a year was mentioned" Perhaps they refer to is what you allude later:

PS: What is presented as current usually excludes interest that will accrue - and have to be paid - during the next 12 months.

Ah ha...

So going by the idea that it is actually the interest that is imminently due on the LT that is of importance (i.e. in resolving the hypothetical net-cash position on the EPV), I had another read of the Note 16 in reports, and we see:

On 17 August 2017, the Group renewed its short-term working capital facilities of £25.0 million.

Just above this I read that £244k on the "Bank loans" row is payable in 6 months or less. And then above this 1.97% is stated as the interest figure on BLs.

So looking at the twenty five million @ 1.97% for 6 months=

25000000 * 0.0197 * 0.5 = £246.2k

I guess that's the £244k figure accounted for?

So, maybe, back to the EPV calculation, one could be "more generous" to Marshalls Plc. and for the overall net cash figure use:

19,845 (cash in current assets) - 35 (from current liabilities) - 244 (what looks like the interest owing on the LT debt) = 19566

What do you reckon?

many thanks
Matt