A retailer reports modest net debt, but it has large lease liabilities, a guarantee of a subsidiary's loan and preference shares. Compute adjusted net debt and adjusted leverage, and compare them with the reported figures.

Adjusted net debt is Rs 1,080 crore, nearly four times the Rs 280 crore reported, and adjusted leverage is 3.27x against 1.22x reported. Leases add Rs 600 crore, the guarantee Rs 150 crore and half the preference shares Rs 50 crore; the denominator becomes EBITDA before rent, Rs 330 crore. Marrowby is a moderately levered retailer presented as a lightly levered one.

A household might say it has only a small car loan, but it also signed a ten-year rental agreement it cannot exit, stood guarantor for a cousin's loan and owes a relative money that must be repaid before anyone else in the family gets anything. A lender counts every fixed claim that ranks ahead of it or with it, whatever the balance sheet calls it. For a retailer the largest of these is usually the store leases: fixed payments for years, as binding as interest.

Start with reported net debt: Rs 400 crore less Rs 120 crore of cash, Rs 280 crore. Add the Rs 600 crore of lease liabilitiesThe present value of fixed rent payments a company has committed to under its leases, shown as a liability under current accounting standards.. Add the Rs 150 crore guarantee, since Marrowby pays if the subsidiary does not. Add half the Rs 100 crore of preference shares, Rs 50 crore, the debt-like half under your methodology. Adjusted net debt is Rs 1,080 crore.

Keep the ratio consistent. If leases are debt, rent is the cost of that debt, so the denominator must be EBITDA before rent, Rs 330 crore, and adjusted leverage is 1,080 over 330, 3.27x. Dividing adjusted debt by EBITDA after rent gives 4.70x, which counts the rent twice, once as debt and once as a cost. Reported leverage, 280 over 230, is 1.22x.

Marrowby is not in trouble at 3.3 times, but it is a different credit from the one management presents, and a covenant written on the reported figure would give lenders almost no protection. Three things to question in the management meeting: whether all Rs 120 crore of cash is really spare, since a retailer needs cash in its tills and stores; how likely the logistics subsidiary is to call the guarantee; and whether any lease terms let Marrowby exit stores early, which would make part of the lease debt less fixed than it looks.