Debt Management: Connecting P&L and Balance Sheet for Accurate Liability Projection

  1. Financial Modelling
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    3. How to Make a Financial Model and choose the best Company and Excel Workbook Setup?
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    5. Financial Statements: A Step-by-Step Guide to Extracting Historical Data
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    7. Learn financial modelling Balance Sheets, P&L, and Assumptions Know About
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    11. The balance sheet’s asset side reveals the company’s line items.
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    15. Gross block & Capex: Constructing the Asset Schedule
    16. Depreciation : Connecting P&L and Balance Sheet for Accurate Asset Forecasting
    17. depreciation expense : Exploring Different Methods in Financial Modeling
    18. Debt Management: Connecting P&L and Balance Sheet for Accurate Liability Projection
    19. Interest Rate Calculation & Debt Schedule
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Marketopedia / Financial Modelling / Debt Management: Connecting P&L and Balance Sheet for Accurate Liability Projection

We covered fixed assets in the previous chapter. As you are aware, this is one of the most significant items on the asset side of the balance sheet. In this chapter, we will focus on debt which is listed on the liabilities portion of the balance sheet.

Let’s use the base rule once more to address debt.

If you take a quick look at the liabilities section of the balance sheet, you’ll notice the debt numbers.

There are three things to note here –

The debt numbers are ‘non-current, in nature. This means these are long-standing debt, carried across multiple years

Secured loan – loan against collateral (mainly in the form of tradable securities)

Unsecured loan – Non-collateralized loan.

Generally speaking, unsecured loans come with a higher rate. In our model, we separate out secured and unsecured loans; yet, this is not always the case.

In order to illustrate the impact of borrowings, I selected Relaxo Footwear’s balance sheet as an example.

The borrowing is listed in the current liabilities section, indicating it’s a short-term debt. The company does not specify whether it is secured or unsecured; you can find details in associated notes, such as note 15.

The notes make it clear that there was no existing borrowing from prior years. However, in 2019 there had been a secured loan which was eventually repaid.

For FY 2020, the loan outstanding (Rs.19.16 Cr) is secure and we can observe the securities pledged to back it up.

Let’s consider another instance.

Biocon Limited’s balance sheet for March 2021 features both current and non-current liabilities in the form of borrowings. However, to find out the specifics behind these liabilities, one will have to refer to the accompanying notes provided by the company.

The borrowing can be either secured or unsecured.

The particulars of our current debt are as follows –

As long as you are aware of the division of loans, you can construct a debt schedule following the practice that will be explained in this chapter.