EBIT/I for Chorus for FY2020 using method 1
Quote:
Originally Posted by
Snoopy
The question I have is, under IFRS16, do I use method 1 or method 2 to calculate EBIT/I? Or do I have a choice which method I use?
Sometimes the easiest way to make sense of these 'theoretical questions' is to do an example. I will do the calculation of "EBIT/I" for Chorus over the last reported year, FY2020.
AR2020 p27 tells us that :
1/ 'Other interest expense' includes $21m of 'lease interest', $5m of amortisation and a $1m restructuring expense due to interest rate swaps. That works out to a total of $27m.
2/ Now, if we go back to p24 of AR2020 and look under the 'expenditure commentary' we can see an entry 'Other $27m'. which ties in.
3/ Back a couple of pages further to p22 of AR2020. Right under the main 'Management Commentary' header you can see how the earnings are calculated. The first step is to take the 'operating revenue' and remove the 'operating expenses'. These are the same 'operating expenses' we have just looked at in a more detailed way on page 24.
These three steps show me that 'lease interest' has already been subtracted from profits. This means we should use 'Method 1' from my previous post when calculating EBIT/I.
EBIT is easy to find, it is listed as $246m on p22 of AR2020.
The slightly more tricky thing is figuring out the 'I' bit.
On page 27 of AR2020 we can see a 'Total Finance Expense' of $185m. But this is not the figure we use.
1/ Right at the top of the page we see 'Finance Income' of $12m that we have to offset against out finance expense.
2/ We must subtract from the 'net interest total' the $29m of 'CIP securities notional interest', because this is an accounting construction that is never actually paid (this is all explained on the Chorus thread, but for the purposes of this exercise please trust me on this point).
3/ Look further up the column and you will see the 'Other interest expense' of $27m that we have been discussing. That $27m has already been used in calculating EBIT. So we have to remove that from the interest bill as well , because if we did not we would, in effect, be counting it twice.
This means the 'Total Net Finance Expense' for our purposes is:
(-$12m + $185m) - $29m - $27m = $117m
So the obvious calculation of EBIT/I for Chorus for FY2020 is: $246m/$117m = 2.10 (using method 1)
SNOOPY
EBIT/I for Chorus for FY2020 using method 2
Quote:
Originally Posted by
Snoopy
The calculation of EBIT/I for Chorus for FY2020 is: $246m/$117m = 2.10 (using method 1)
Now let's look at the alternative calculation method 2, where 'lease interest' (as part of 'Other Interest') is not taken into account when calculating EBIT.
EBIT now changes to $246m + $27m = $273m
With this iteration we have chosen not to take the lease interest into account as earnings. So instead we must include 'Other interest' as part of the total interest bill due by not subtracting it. This means the 'Total Net Finance Expense' for our purposes is now:
-$12m + $185m - $29m = $144m
So the calculation of EBIT/I for Chorus for FY2020 becomes: $273m/$144m = 1.89 (using method 2)
That isn't grossly different, except there is a 'rule of thumb' that says an EBIT/I ratio above 2 is passable, while anything below that is dodgy. So is 'method 1' or 'method 2' the better way of calculating this ratio? I don't know the answer. My solution is to curse IFRS16 and go to bed.
SNOOPY
EBIT/I for Chorus for HY2021 using method 1
Quote:
Originally Posted by
Snoopy
The calculation of EBIT/I for Chorus for FY2020 is: $246m/$117m = 2.10 (using method 1)
The half year results for FY2021 are available. So let's see what EBIT/I did for the six months after EOFY2020. This isn't straightforward, because the disclosure at half year result time is less full than in the whole of year accounts.
EBIT = $114m vs $246m for the FY2020 full year (p5 HYR2021),
Net Finance Expense = $0m - $77m = -$77m vs $12m - $185m = $173m for the FY2020 full year. (p5 HYR2021)
A problem now arises because there is no breakdown of the finance expenses given for the half year. Given the comparative figures are given for the previous full year in the half year report, we have to assume there is no difference in the way the calculations have been made at HY2021 when compared with FY2020. That means if we work out our metric using the raw figures in HYR2021:
EBIT/I = $114m / $77m = 1.48
then we are 'double counting' the effect of 'lease interest payments'. Firstly because they have reduced EBIT in the numerator. Secondly because they have increased I in the denominator. You should do one or the other, but not both. My contention then is that there is insufficient information disclosed by Chorus to allow the calculation of EBIT/I over the half year period.
If we instead focus on the twelve month period comprising 2HY2020 and HY2021, then the calculation changes to this:
EBIT/I = (($246m-$134m) + $114m)/ (($185m - $95m) + $77m) = 1.35
This metric is also wrong, because it suffers from the same 'double counting' problem I have just described. If we look at the published information from third parties:
Morningstar:
https://www.morningstar.com/stocks/xnze/cnu/financials
lists the available EBIT/I for Chorus as 1.38 (close to my 2HY2020 + HY2021 figure in this post)
Simply Wall Street:
https://simplywall.st/stocks/nz/tele...nsidered-risky
lists the available EBIT/I for Chorus as 1.5 (close to my HY2021 figure in this post)
I submit that both of the 'Morningstar' and 'Simply Wall Street' EBIT/I figures are wrong, because they have both 'double counted' lease interest. I can't tell you what the correct figure is because there is insufficient disclosure by Chorus to allow us to work that out. Blame IFRS16 for this mess.
SNOOPY