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Financial Analysis and Valuation

Liability vs Debt

Liability VS Debt: 

LIABILITY 

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).  

DEBT 

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.) 

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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 

NOPLAT • ROIC 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 Assets Assets Operating + Debt + Equity Liabilities • We can create two new terms, invested capital and total funds invested: Operating Assets Operating Liabilities Nonoperating Assets Invested capital equals operating assets less operating liabilities. Total funds invested equals invested capital plus nonoperating assets. USCMarshall School of Business = Debt + Equity Total funds invested can also be measured by summing debt plus equity FBE 529 - Scott Abrams - Spring 2021 165
Invested Capital: Operating pers ective Operating Assets 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 Debt Debt Equivalents Equity Equity Equivalents Total Funds Invested 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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