Accounting Ratios

Debt reconciliation

Our Debt Reconciliation model aims to highlight companies using non-cash transactions to inflate operating cash flows (OPCF). Around 5% of companies globally trigger the model although this likely includes a large number of false positives. If triggered, download the annual report and look for a reconciliation of liabilities from financing activities within notes to the accounts. This will detail whether non-cash payments are being used, or whether the model was triggered by mistake. If this information is not available, manually reconcile changes in debt on the balance sheet with the cash flow. If balance sheet debt is growing faster than that implied in the cash flow, it is possible that the difference relates to non-cash payments. Contact management for confirmation. If the use of non-cash payments is confirmed, materiality needs to be established. Adjust OPCF (use the Bloomberg standard format) and compare to debt (excluding leases). If debt to adjusted OPCF exceeds 6x, leverage is uncomfortably high.

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