I am trying to learn more about "capital based" debt measurements. As many here already know, I have discovered that there are several. What's more confusing is that the most popular term, "debt ratio" seems to get overloaded sometimes - most of the time, the ratio debt/assets tends to be used, but I did also find just here:
https://www.ukvalueinvestor.com/2014/11 ... nies.html/
someone stating that this ratio to be debt/profit after tax.
To avoid confusion I'm going to focus on the more frequently used debt/assets method. However even this simple ratio, it seems, can be interpreted in different ways, depending on whether net or gross variants of those two measures are used, but I plan to talk about those in a later post.
The definition, I currently believe to be the most popular (I stand to be corrected), seems to be this:
gross debt/total assets
where "gross debt" is the sum of all "interest bearing" items in the current and non-current liabilities sections. Where as "total assets" is less discriminatory and is really non-current assets + current assets. This is what I want to understand better in this post.
From Phil Oakley's book "How to pick Quality shares", he exemplifies Dominos position in their y/e of 2015. This is a trimmed down version of their balance sheet for that period:
(All values in £000s)
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Total assets 185,446
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Current liabilities
Trade and other payables (52,912)
Deferred income (4,312)
Financial liabilities (988) *
Deferred and contingent consideration (2,865)
Current tax liabilities (4,151)
Provisions (6,113)
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Non-current liabilities
Trade and other payables (316)
Financial liabilities (11,450) *
Deferred income (3,334)
Deferred and contingent consideration -
Deferred tax liabilities (115)
Provisions (1,215)
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In Phil's book, he states At the end of 2015 Domino's had £12.4m of total borrowings and £185.4m of the total assets, giving a very low debt to total assets ratio of 6.7%.
So indeed Phil sums only the liability items which I've starred, i.e. the interest bearing ones.
I'm now going to attempt a similar calculation using NextPLC's consolidated balance sheet for 2014-15.
(All values in £M)
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Total assets 2,282.3
Current liabilities
Bank loans and overdrafts 17 (2.8) *
Trade payables and other liabilities 18 (636.5)
Dividends payable 8 (73.9)
Other financial liabilities 19 (109.4)
Current tax liabilities (64.0)
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Non-current liabilities
Corporate bonds 20 (838.2) *
Provisions 22 (9.4)
Other financial liabilities 19 (11.8)
Other liabilities 18 (214.4)
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So what liabilities should I include as "interest-bearing" and therefore as debt?
Bank loans+overdrafts note 17 repayable on demand and bear interest
Trade payable+other liabilities note 18 do not bear interest and are generally settled on 30 day terms. Other creditors and accruals do
not bear interest.
Other financial liabilities note 19. Seem to mainly be forexs+share purchase contracts. I see no mention of a rate, so I'm assuming non interest bearing.
Corporate bonds note 20. These are interest bearing (there is a confusing sub-note 20, referring to derivatives used to manage IR risk, which next then state a nominal value of 787.6, presumably of their bond-related after the hedging, but for simplicities sake, I'll stick with 838.2 as value of this debt)
Dividends note 8. Non interest bearing.
Provisions note 22. Non interest bearing.
I'm going to assume that the gross (interest-bearing) debt for NXT at y/e of 2015 is overdrafts/bank loans 2.8 + corporate bonds 838.2 = 841.0.
So using debt ratio
gross debt/total assets = 841/2282.3 = 36.84%.
Would anyone be able to verify that my thought process is correct? That is, going by the commonly held definition of "debt ratio" (gross debt/total assets), that for NXT 2015 my calculation is correct.
Many thanks
Matt (and Mel)