Through regular review of our models, we identified an opportunity to improve how we treat interest and debt in our models for all homebuilders.
Generally, we treat the amortization of capitalized interest as a financing activity and consider it to be a non-operating expense. However, as homebuilders often use debt to acquire land upon which to build their finished product, many homebuilders bundle the amortization of capitalized interest in cost of sales. After reviewing disclosures in 10-Qs and 10-Ks, we’re updating our models to more closely align with how homebuilders use debt in their operations.
The changes being made through this update are:
- Treat capitalized interest as an operating expense and include in total interest expense
- Treat all debt as operating debt instead of financing debt
After these changes, our models will better represent the ongoing operations of homebuilders and how they use debt.
This update will generally result in the following changes for homebuilders:
- lower NOPAT: capitalized interest expense will now be considered an operating expense.
- lower interest coverage ratio: interest expense will rise due to the inclusion of capitalized interest.
- lower Invested Capital: debt will now be treated as operating, which will increase current liabilities and lower net working capital.
We expect this update to impact Overall Stock Ratings as follows:
- Improve for three companies
- Decline for three companies
We expect this update to impact Overall Credit Ratings as follows:
- Improve for one company
- Decline for six companies
No two companies are the same, and no single metric perfectly captures the economics of every company. That’s why we’re always looking to improve our models based on the latest disclosures and continue providing clients proven-superior fundamental data.
These changes are live on our site as of September 10, 2024.
This article was originally published on September 11, 2024.
Disclosure: David Trainer, Kyle Guske II, Hakan Salt, and Robbie Woodward receive no compensation to write about any specific stock, sector, style, or theme.
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