Financial Analysis and Valuation

Liability vs Debt

Liability VS Debt: 


Accountants describes liability as a present contractual commitment to another entity that entrails settlement by probably future transfer or use of assets on an agreed upon date (or timing) when the obligating event has already occurred. There is no exact definition of debt in accounting, and not all liabilities are debt. Also, it is possible that some types of debt are not considered a liability by accountants (off-balance sheet financing).  


For our purposes, debt is an amount contractually owed to another party that has an explicit or implicit interest payment that we can measure. That includes notes, mortgages, bonds (debentures), and other financing instruments that typically have an explicit or implicit interest rate. That EXCLUDES liabilities such as deferred income taxes, unearned revenue, and most other operating liabilities (for example, accounts payable (AP), wages payable, accruals, etc.) 


ROIC – Return On Invested Capital = NOPLAT/Invested Capital (=debt + equity) 
NOPLAT = Net Operating Profits After Tax (to get the tax rate = taxable income/tax expense) 
NWC (Net Working Capital) = current assets – current liabilities 

Invested Capital 
• NOPLAT= EBIT* (I-t) 
• Total Invested Capital = Equity plus interest bearing debt
Reorganizing the Balance Sheet: 
Invested Capital 
• By separating line items and rearranging the accounting identity, 
Operating Nonoperating 
+ Debt + Equity 
• We can create two new terms, invested capital and total funds invested: 
Invested capital equals 
operating assets less 
operating liabilities. 
Total funds invested equals 
invested capital plus 
nonoperating assets. 
School of Business 
= Debt + Equity 
Total funds invested can 
also be measured by 
summing debt plus equity 
FBE 529 - Scott Abrams - Spring 2021 
Invested Capital: Operating 
pers ective 
Operating Liabilities 
Invested Capital 
Nonoperating Assets 
Total Funds Invested 
Operating assets include current operating assets (working cash, accounts 
receivable, inventory, prepaid expenses), along with PP&E and net other long- 
term operating assets. Include capitalized leases and R&D as operating assets. 
Operating liabilities include non-interest-bearing current liabilities; the most 
common are related to suppliers (accounts payable), employees (accrued 
salaries), customers (deferred revenue and customer advances), and the 
government (income taxes payable). 
Nonoperating assets include excess cash, marketable securities, notes 
receivable, prepaid pension assets, nonconsolidated subsidiaries, and other 
equity investments). 
Total funds invested from an operatinq perspective.
Invested Capital: 
Financin Pers ective 
Equity Equivalents 
Total Funds 
Debt includes all interest-bearing debt from banks and public capital markets. 
Debt equivalents include off-balance-sheet debt and one-time debts owed to 
others that are not part of ongoing operations (e.g., severance payments as part 
of a restructuring, an unfunded pension liability, or expected environmental 
remediation following a plant closure). 
Equityincludes original investor funds (common stock and additional paid-in 
capital, net of treasury stock repurchased), investor funds reinvested into the 
company (retained earnings and accumulated other comprehensive income), 
and investor funds to be paid out shortly (dividends payable). 
Equity equivalents include accounts that arise because of noncash 
adjustments to retained earnings; they are similar to debt equivalents but are 
not deducted from enterprise value to determine equity value (e.g., most 
deferred-tax accounts and income-smoothing provisions). 
Total funds invested from a financinq perspective.

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