Why do you need to subtract net interest bearing debt to get equity value

This formula is based on the balance sheet for management.

Net liabilities are not a concept in the general balance sheet, but are abbreviated for net financial liabilities in financial management, that is, the difference between financial liabilities and financial assets. The reason why it is not called debt value is because debt value is a general balance sheet concept, and actually includes operating liabilities (such as accounts payable, etc.).

To understand this formula, we must first understand the basic equation of net operating assets = net liabilities + owners' equity in Chapter 2 of the note. Owner's equity corresponds to equity flow and equity value; Net operating assets correspond to entity flow and entity value; Net debt corresponds to debt flow and net debt value.

Net debt is the amount of debt less cash and cash equivalents in the balance sheet. It is the difference between the total debt and the company's cash balance.

Details: Total debt refers to all debts issued and circulated by the company. Net debt is the difference between total debt and the company's cash balance.

In order to obtain the value of the company, it is generally safer to value the company on the basis of the total debt issued and circulated, and to add the outstanding cash balance to the value of the operating assets. Interest payments on the total debt then give the debt a tax benefit, and it is possible to gauge whether the company's investment of cash can effectively affect the value.

In some cases, especially when companies routinely maintain large cash balances, analysts tend to use the net debt ratio. If the net debt ratio is chosen, it is important to maintain consistency in all approaches in the valuation. First, a company's beta should be estimated using the net debt-to-equity ratio rather than the total debt-to-equity capital ratio.

The cost of equity capital generated from the beta estimate can be used to estimate the cost of capital, but the market value weight of the debt should be based on net debt. Once a company's cash flow is discounted using the cost of capital, it should not be added back to cash. Instead, the net debt issued and outstanding should be subtracted in order to make an estimate of the value of the equity capital.

Implicitly, when the net debt ratio is obtained by subtracting cash from debt, we assume that cash and debt have roughly similar risks. While this assumption may be normal when analyzing companies with very high ratings, it becomes more vulnerable when debt is more risky. For example, the debt of a BB-rated company is more risky than the company's cash balance, and subtracting one from the other will lead to a misconception about the risk of default by the company in question.

In general, the royal net debt ratio will overvalue a riskier company.

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The translation and meaning of this word are as follows: the calculation method is short-term and long-term interest-bearing bonds minus cash (and cash equivalents).

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Entity Value = Equity Value + Debt Value.

Appendix: Calculation of entity value.

Calculate NOPAT (Net Operating Profit After Tax) :(Total Profit + Interest Expense) * (1 - Income Tax Rate).

Calculate the operating working capital and long-term net operating assets (which are clear on the table).

Operating working capital = operating current assets - operating current liabilities.

Long-term net operating assets = long-term operating assets - long-term operating liabilities.

The sum of the above equals the total net operating assets.

The subtraction of the current year from the previous year is equal to net investment (or increase in net operating assets).

If there is a depreciation consideration in it, the physical cash flow is easy to calculate, unless the question requires a detailed calculation: physical cash flow = NOPAT - net investment (increase in net operating assets).

Calculate the discount rate (not discussed here).

Discount the real value according to the discount rate, and calculate it.

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Market capitalization includes both equity value and debt value. Free cash flow also includes equity cash flow and debt cash flow, and creditors are considered investors in the business.

It feels a bit of a problem, using the book value of debt as an approximation should be closer to 1000, not 900, anyway, I am very skeptical about it, especially the calculation of equity cash flow, according to the formula it gives does not need too much financial knowledge according to the formula can be calculated, I have read a book before that the value of the enterprise is divided into two parts, one is brought by the assets related to the operation, and the other is brought by non-operating assets such as financial assets. Related to business activities, the absolute valuation method or the income method is used to evaluate the value of operating assets to obtain the value of operating assets, just like a chicken has to look at it as a whole, and should not be seen as how much its wings are worth, how much chicken legs are worth, how much is the chicken body worth and finally add up, but should raise it well, let it lay eggs until it can not lay eggs when it is sold Yes ** This method is evaluated, and other methods can be used for evaluation of non-operating assets. Then use the value of operating assets plus the value of non-operating assets to obtain the total value of the enterprise, and then use the value of book debt to calculate the equity value, its core concept is that the operating assets of the enterprise are essential, and the non-operating assets have nothing to do with the core business of the enterprise. I can find some explanation elsewhere for these questions to overturn the rigor of its thinking. Wrong thinking can easily lead to a deadlock in thinking.

According to the accounting identity, assets = owners' equity + liabilities, and owners' equity is basically the content of equity value.

For example, if a company lends you money, and other payables (liabilities) increase, is it cash (assets) that also increases. The two sides of the balance sheet are in a relationship of increasing and decreasing.

The value of an enterprise is the present value of the expected free cash flow of the enterprise discounted at the discount rate at its weighted average cost of capital, which is closely related to the financial decision-making of the enterprise, reflecting the time value, risk and sustainable development ability of the enterprise's funds.

Expanding to the field of management, enterprise value can be defined as the ability of an enterprise to follow the law of value and make all corporate stakeholders (including shareholders, creditors, managers, ordinary employees, etc.) obtain satisfactory returns through value-centered management.

From a financial management perspective, enterprise value has many different manifestations – book value, market value, appraisal value, liquidation value, auction value, and so on. Objectively speaking, every form of value has its rationality and applicability.

On the other hand, is the value of the enterprise equal to the total assets of the enterprise? According to the accounting identity, assets = owner's equity + liabilities, and owner's equity is basically the content of equity value. I still don't understand, so let's take another example, for example, if a company lends you money, and other payables (liabilities) increase, does cash (assets) also increase at the same time?

The two sides of the balance sheet are in the same relationship of increasing and decreasing, don't look at the problem separately, you will understand.

Suppose there is such a company, the total market value is 10 billion, the company owes others 2 billion, you spend 10 billion to buy this company, the 2 billion debt also needs you to repay, the total cost of you to buy this business is 10 billion + 2 billion 12 billion. The more debt you have, the more money you need to spend to pay off the debt, and the more it will cost you to buy the business.