Credit rating based on Cash FLow analysis

CFA Level II
#1

When trying to assess credit rating based on Cash Flow Analysis, We do: Free Operating Cash Flow = Fund from Operations - Change in Working capital - Capital Expenditure Should we also consider OFF-BALANCE SHEET LIABILITIES in the calculation above? In other words, Free Operating Cash Flow = Fund from Operations - Change in Working capital - Capital Expenditure - (Off-Balance Sheet Liabilities) Thanks for your help

#2

i don’t see anything about off-B/S liabs on the formula sheet in schweser

#3

First, your formula makes no sense. It’s basically operating / changes in cash flow calculation and then an oddly subtracted balance sheet figure at the end. If anything it would be the CHANGE in off-balance sheet liabilities YoY that is subtracted. Second, the right way to include an off balance sheet liability is to bring it onto the balance sheet in the first place and then calculate operating cash flow. Such as an operating lease, if you brought it onto the balance sheet and treated it as a capital lease, then you would have higher depreciation (included in funds from operations), etc. So long story short, no your formulas makes no sense. And secondarily, you are thinking about off balance sheet items in the wrong way. You bring them onto the b/s first, then calc a cash flow figure.

#4

I actually got the equation from CFAI notes…