This is Part 3 of a Series. Go to Part 2: Core Business Profitability and Its Mathematical Derivation
We qualify Financial Liabilities because these are those interest-bearing debt which the company has deliberately sourced externally to finance its operations, as opposed to Trade Liabilities which came about because of business operations (e.g. accounts payable).
Financial Liabilities can be observed under Cash Flow from Financing Activities while Trade Liabilities can be seen under Cash Flow from Operating Activities.
Effective Interest Rate is computed as follows:
We qualify Financial Liabilities because these are those interest-bearing debt which the company has deliberately sourced externally to finance its operations, as opposed to Trade Liabilities which came about because of business operations (e.g. accounts payable).
Financial Liabilities can be observed under Cash Flow from Financing Activities while Trade Liabilities can be seen under Cash Flow from Operating Activities.
Effective Interest Rate is computed as follows:
Interest Expense / Financial Liabilities = Interest Rate
From a profitability-biased stand point, the company
should only be borrowing money at a rate lower than what it can make from its
core business operations (i.e. Core Business Profitability). Nonetheless, the
effect this cost of borrowing brings against corporate profitability can only
go insofar as to how much Financial Liabilities weigh against overall Operating
Assets:
Financial Liabilities / Operating Assets = Financial
Liabilities Weight
Thus:
Core Business Profitability (i.e. EBIT/Operating Assets)
minus
Interest Rate x Financial Liabilities Weight
equals
(EBIT - Interest Expense)/Operating Assets
Which simply is:
EBT / Operating Assets = After Interest Business
Profitability
Continue to Part 4: The Burden of Taxation and the Final Form of Corporate Profitability
Continue to Part 4: The Burden of Taxation and the Final Form of Corporate Profitability
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