Enterprise value and leverage ratios can be meaningfully understated if you stop at traditional bank debt.
Two obligations that regularly appear - and are regularly missed - are IFRS 16 lease liabilities and end-of-service benefits (EOSB). Neither is identical to bank debt, but both represent real cash obligations that a well-constructed valuation should address.
IFRS 16 Lease Liabilities
Since IFRS 16 became effective, companies report lease liabilities directly on the balance sheet. Use these reported figures as debt-like items in your enterprise value bridge and leverage calculations.
Consistency check: Make sure your EBITDA treatment and EV/EBITDA multiples are consistent with how you handle leases. If you are using EBITDA before lease costs (sometimes called EBITDAL), your EV should include lease liabilities. If you are using EBITDA after lease costs, the treatment is different. Mixing the two is a common but avoidable error.
EOSB as a Debt-Like Obligation
End-of-service benefits are a statutory employee obligation embedded in Saudi labour law. In some sectors - especially labour-intensive businesses - EOSB can be a material item.
EOSB is not a financial instrument, and its cash timing is uncertain, so it is not a perfect analogue to bank debt. However, the liability represents a real claim on the business that can be significant in downside or restructuring scenarios.
A transparent approach is to:
- Present valuation with and without EOSB in the debt bridge
- Clearly document whether EOSB is included in the base case and why
Enterprise Value Bridge (Illustrative)
EV = Equity Value + Financial Debt + Lease Liabilities + EOSB − Cash
This bridge should be stated explicitly in the valuation with each component labeled and sourced.
Governance Rule
Show sensitivity to the inclusion or exclusion of EOSB in your leverage metrics. For businesses where EOSB is large relative to EBITDA (above 0.5x), it deserves its own line item in the debt schedule.
This article is for educational purposes only. It explains valuation concepts and modeling choices. It is not investment advice, a recommendation, or a financial promotion. Examples use illustrative inputs. Verify all data using primary sources and consult an appropriately licensed professional before making financial decisions.
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Abdul Gaffar Mohammed, CFA
Treasury & Investment Professional