Hi all, Do you know whether restricted cash (in ths case, held as collateral for derivative positions) should be deducted when calculating the net debt of the firm? Please provide some explanation for taking it out or not. Thanks a lot!
I don’t really know what you’re asking exactly but restricted cash is an asset (it is cash, after all, even if it is restricted).
I would go with “depends”
I would exclude in this case as the restricted cash cannot be used to pay off debt.
In my humble opinion: 1. If cash is earmarked for a specific purpose (other than debt repayment I suppose) it is not correct to subtract it in a net debt calculation, as cash is usually subtracted because it could theoretically be used to pay down debt. 2. Contrary to JoeyDVivre’s advice, in a net debt calculation it is not correct to begin subtracting balance sheet items, or the criteria that they are assets. That my friend would lead to some pretty funky financial analysis.
Ok how’s this! if the derivative position that the cash is held for is included in the long term debt then it’s ok to subtract it to determine the net debt! How’s that for a perfect answer?
Yeah, I think if cash is restricted because it’s being held as collateral for something else that’s on the balance sheet as a liability, then it’s ok to have it. It may need to be adjusted for measures of liquidity though, since it’s an asset, but not as liquid as cash would normally be. So it might be sensible to remove it from things like current ratios, etc. If the cash is restricted because of something that is not on the balance sheet, then the procedure (might) be to either 1) bring the something else onto the balance sheet, or 2) reduce the cash value by some probability reflecting that it might not actually be available for other purposes (sort of like adjusting accounts receivable for the possibility of non-payment or returns). I must say that the best part of doing L3 is not having to remember all the FSA minutiae.