Chapter 19 : Non-Operating Assets and Liabilities, and Computation of Shareholder Value


If you count all your assets you always show a profit.

Wilson Mizner

The shareholder value consists of present value of operating cash flows plus or minus the market value of non-operating assets and liabilities, as follows:

Operating Cash Flows


  • The Present Value (PV) of cash flows from operations during the forecast period, plus
  • Present Value of terminal value of the company, plus or minus

Non-Operating Assets and Liabilities


  • Cash & Marketable Securities and other investments (the income from these investments should not be included in cash flows from operations), minus
  • Minority Interest and Other Liabilities, minus
  • Debt and Long-Term Obligations

Non-Operating Assets are those assets that are not required for generating operating cash flows.

This is the final estimate required in the valuation process.

Here, we require the balance sheet items, which will consist of

  • Non-operating assets and liabilities not required to generate operating cash flows, and
  • Liabilities such as debt, minority interest, and other liabilities

These should be added or deducted from the operating cash flows to arrive at the shareholder value. These non-operating assets and liabilities items in the balance sheet include :

Cash & Securities


This is the cash and securities at market value including short-term investment of the company as of the prior period ending. This is generally the surplus cash sitting in the balance sheet. For instance, Apple Inc. has $48.31 billion in cash and marketable securities as of September 30, 2022 which will be added to operating cash flows to arrive at the intrinsic value/shareholder value.

Investments


These are investments in the books as in the prior period. This would be the estimated market value of investment in subsidiaries or joint ventures or other partnerships or land and building investments not required for business operations or which the financial information would not be consolidated. For instance, Apple Inc. has $175 billion in Non-current Assets and investments as of September 30, 2022 which will be added to operating cash flows to arrive at the intrinsic value/shareholder value.

Another example is Trent Limited - a company listed on Indian Stock Exchanges holds 49% of Inditex Trent shareholding as on March 31st, 2021. Inditex Trent is assumed to be valued at INR 178 billion, thus the market value of 49% Inditex should be taken at INR 87 billion as investment value in the non-operating assets of Trent Limited instead of the book value.

Other Assets


The items in other assets could include deferred tax assets and other non-operating assets and expected contingent assets. The income from these assets should not be considered as sales. This will be added to operating cash flows to arrive at the intrinsic value/shareholder value.

Minority Interest


All companies need to report their consolidated accounts and in many companies, there is Minority Interest. The market value/estimated value needs to be taken to arrive at the minority interest. This should be done if the company is being valued on a consolidated basis for these investments and there is a minority interest. This will be deducted from the operating cash flows to arrive at the intrinsic value/shareholder value.

For instance, Biocon Limited, a company listed on Indian Stock Exchanges, reports its consolidated numbers and has a 70.58% shareholding in Syngene International as of March 31st, 2021. The market capitalization of Syngene is INR 23.7K crores. Thus, 29.42% of 23.7K crores, which is INR 6.97K crores, should be taken as minority interest value and deducted from operating value to arrive at the intrinsic value/shareholder value of Biocon Limited.

Other Liabilities


Other liabilities should include deferred tax liabilities, non-interest bearing obligations, underfunded pensions and health care obligations, and expected contingent liabilities as of the ending of the prior period. This will be deducted from the operating cash flows to arrive at the intrinsic/shareholder value.

Debt & Obligations


'Debt & Obligations' is the value of debt and interest bearing obligation as of the prior period ending. The debt portion should include short-term borrowings. This will be deducted from the operating cash flows to arrive at the shareholder value.

Outstanding Shares


Outstanding shares are the company's stock /shares currently held by all its shareholders. Outstanding shares should include equity options, convertible shares, and warrant options. This will be obtained from the balance sheet of the company and it is required to compute the intrinsic value/shareholder value per share.

In the example of Black Bay Pizza, the outstanding shares are assumed to be 100.

Example of Non- Operating Assets and Liabilities for Black Bay Pizza


Continuing with the example of Black Bay Pizza, we now present the Non-Operating Assets and other Liabilities for Black Bay Pizza in Table 13,

Table 13 - Non- Operating Assets and Liabilities for Black Bay Pizza

Assumptions

Cash and Securities 250
Investments 150
Other Assets 50
Minority Interest 100
Debt 1000

Computation of Shareholder Value


The computation of Shareholder value and Shareholder Value per share is arrived by adding or deducting Non-Operating assets and Other Liabilities to Cumulative Present Value of Cash Flows during the Forecast Period and Present Value of Terminal value. The Shareholder Value is then divided by outstanding shares to arrive at Shareholder Value per share. The Shareholder Value and shareholder value per share for black Bay Pizza is presented below as Table 14.

Table 14 - Computation of Shareholder Value

Cumulative Present Value of Cash Flows - Forecast Period (Refer Table 12) 276
Present Value of Terminal Value - Chapter 18 3659
PV of Cash Flow from Operations 3934
Cash and Securities 250
Investments 150
Other Assets 50
Minority Interest (100)
Debt (1000)
Shareholder Value (a) 3284
Outstanding Shares (b) 30
Shareholder Value Per Share (a/b) 109