To estimate the FFO / Net Debt ratio for Hera S.p.A. for the year 2022, we need to calculate two components: Funds From Operations (FFO) and Net Debt. **1. Calculate Funds From Operations (FFO)** FFO is typically calculated as Net Income (Profit/Loss) plus Depreciation, Amortization, and other non-cash charges. In the context of European utilities and the data provided, a common proxy for FFO is "Cash Flows From Used In Operations Before Changes In Working Capital" or explicitly calculating it from the P&L. Let's use the standard definition: $$FFO = \text{Net Income} + \text{Depreciation & Amortization} + \text{Other Non-Cash Items}$$ However, a more robust measure often used in credit analysis for utilities is **EBITDA** or **Operating Cash Flow before working capital changes**. Let's look at the provided cash flow statement items. The item `"Cash Flows From Used In Operations Before Changes In Working Capital"` for 2022-01-01 - 2023-01-01 is **1,202,000,000 EUR**. This figure represents the cash generated from core operations before the impact of working capital fluctuations. This is a very close proxy for FFO in many contexts, or we can derive FFO from the bottom up. Let's try deriving FFO from Net Profit: * **Profit Loss (Net Income)**: 305,300,000 EUR * **Add back: Amortisation Depreciation And Provisions**: 667,100,000 EUR * **Add back: Finance Costs (Net)**: The net finance cost is 125,000,000 EUR (expense). Interest is a financing activity, so it's often added back to get to an operating cash flow metric, but FFO usually starts from Net Income. * **Add back: Income Tax Expense**: 103,500,000 EUR * **Adjust for non-cash items**: * Share of profit of associates: -10,000,000 EUR (This is a non-cash gain included in profit, so we subtract it). * Other non-monetary elements/Capital gains: The cash flow statement lists "Capital Gains Losses And Other Non Monetary Elements" as 41,600,000 EUR. This is likely a gain, so we subtract it. * Change in provisions: The cash flow adds back "Allocation To Provisions" (188,500,000) and adjusts for "Change In Provision For Risks And Charges" (-27,800,000). A simpler and often more accurate proxy for FFO in this dataset is the **"Cash Flows From Used In Operations Before Changes In Working Capital"** which is explicitly given as **1,202,000,000 EUR**. This metric effectively adds back D&A and changes in provisions to EBIT, representing the cash generation capability before working capital needs. Let's use this value as the numerator (FFO). * **FFO (2022)** = 1,202,000,000 EUR **2. Calculate Net Debt** Net Debt is calculated as Total Financial Debt minus Cash and Cash Equivalents. From the Balance Sheet data for 2023-01-01 (which represents the end of the 2022 fiscal year): * **Financial Liabilities (Debt):** * Noncurrent Financial Liabilities: 5,689,900,000 EUR * Current Financial Liabilities: 650,100,000 EUR * *Note: Lease liabilities are often treated separately or included in debt depending on the definition. Standard Net Debt usually includes interest-bearing borrowings. Let's include lease liabilities if they are considered part of the debt burden, but strictly "Financial Liabilities" are the primary component. Let's look at the components.* * Noncurrent Lease Liabilities: 55,100,000 EUR * Current Lease Liabilities: 21,300,000 EUR Total Interest-Bearing Debt (including leases) = 5,689,900,000 + 650,100,000 + 55,100,000 + 21,300,000 = **6,416,400,000 EUR**. If we exclude leases (strictly financial borrowings): Total Financial Borrowings = 5,689,900,000 + 650,100,000 = **6,340,000,000 EUR**. * **Cash and Cash Equivalents:** * Cash And Cash Equivalents (2023-01-01): **1,942,400,000 EUR** * **Net Debt Calculation:** Using Total Financial Borrowings (excluding leases, as is common in some strict definitions, but including them is more comprehensive for "Net Debt" in IFRS 16 environments. Let's check the magnitude. Hera is a utility, leases are significant. However, "Financial Liabilities" usually refers to bank debt/bonds. Let's stick to the explicit "Financial Liabilities" lines for "Debt" and subtract cash. Total Financial Liabilities = Noncurrent Financial Liabilities + Current Financial Liabilities Total Financial Liabilities = 5,689,900,000 + 650,100,000 = 6,340,000,000 EUR. Net Debt = Total Financial Liabilities - Cash and Cash Equivalents Net Debt = 6,340,000,000 - 1,942,400,000 = **4,397,600,000 EUR**. *Alternative including leases:* Total Debt (incl leases) = 6,416,400,000 EUR Net Debt (incl leases) = 6,416,400,000 - 1,942,400,000 = 4,474,000,000 EUR. Let's calculate the ratio for both to see which is more standard. Usually, "Net Debt" in credit metrics for utilities includes lease liabilities under IFRS 16. Let's use the inclusive figure (4,474,000,000 EUR) as it reflects the total indebtedness. However, many simple ratios just take "Financial Liabilities". Let's look at the "Finance Costs" vs debt size to infer. Let's stick to the explicit "Financial Liabilities" label for the denominator's debt component, as "Lease Liabilities" are listed separately. Debt = 6,340,000,000 EUR. Cash = 1,942,400,000 EUR. Net Debt = 4,397,600,000 EUR. **3. Calculate the Ratio** $$ \text{FFO / Net Debt} = \frac{1,202,000,000}{4,397,600,000} $$ $$ \text{Ratio} \approx 0.2733 $$ If we included leases in debt: $$ \text{Ratio} = \frac{1,202,000,000}{4,474,000,000} \approx 0.2686 $$ If we used Net Income + D&A as FFO: FFO = 305.3m + 667.1m = 972.4m. Ratio = 972.4 / 4397.6 = 0.221. However, "Cash Flows From Used In Operations Before Changes In Working Capital" is a superior proxy for FFO because it includes changes in provisions (which are non-cash expenses added back in the indirect method) and other adjustments that "Net Income + D&A" might miss or double count. The value 1,202,000,000 EUR is explicitly labeled as cash flow from operations before working capital, which is the definition of FFO in many credit rating methodologies (like S&P or Moody's for utilities). Let's refine the Net Debt. Often, "Net Debt" = (Short term debt + Long term debt) - Cash. Short term debt (Current Financial Liabilities) = 650,100,000 Long term debt (Noncurrent Financial Liabilities) = 5,689,900,000 Total Debt = 6,340,000,000 Cash = 1,942,400,000 Net Debt = 4,397,600,000 FFO = 1,202,000,000 Ratio = 1,202,000,000 / 4,397,600,000 = 0.27333... Let's double check if "Current Derivative Financial Liabilities" should be included. Usually, derivatives are marked-to-market and not part of core net debt unless they are hedging instruments affecting the debt profile. Standard Net Debt excludes derivatives. Let's double check if "Lease Liabilities" should be included. Under IFRS 16, leases are debt. If we include them: Debt = 6,340,000,000 + 55,100,000 + 21,300,000 = 6,416,400,000. Net Debt = 6,416,400,000 - 1,942,400,000 = 4,474,000,000. Ratio = 1,202,000,000 / 4,474,000,000 = 0.26866... Given the ambiguity, the most standard "Net Debt" definition in financial reporting analysis often refers to interest-bearing financial liabilities. Lease liabilities are increasingly included. However, looking at the magnitude, the difference is small (0.273 vs 0.269). Let's consider the source. Hera S.p.A. is an Italian utility. Italian companies and rating agencies often use "Net Financial Position" (NFP) which includes leases. If we assume the question implies a standard credit metric: FFO = 1,202,000,000 Net Debt (including leases) = 4,474,000,000 Ratio = 0.2687 If we assume strict "Financial Liabilities" only: Ratio = 0.2733 Let's look at the "Finance Costs". 217.2M EUR. Average Debt approx 6B. Interest rate approx 3.6%. This seems reasonable. Let's provide the answer based on the stricter definition of Financial Liabilities (excluding leases) as they are listed separately, but acknowledge that including leases is also common. However, without specific instruction to include leases, "Financial Liabilities" is the specific line item for debt. Wait, looking at the cash flow statement, "Payments Of Lease Liabilities Classified As Financing Activities" is 43,400,000 EUR. This confirms leases are treated as financing. Therefore, they are part of the debt burden. It is more accurate to include them in Net Debt for a utility company under IFRS 16. Recalculating with Leases: Total Debt = 5,689,900,000 (Non-current Fin) + 650,100,000 (Current Fin) + 55,100,000 (Non-current Lease) + 21,300,000 (Current Lease) = 6,416,400,000 EUR. Cash = 1,942,400,000 EUR. Net Debt = 4,474,000,000 EUR. FFO = 1,202,000,000 EUR. Ratio = 1,202,000,000 / 4,474,000,000 = 0.26866... Rounding to two decimal places: 0.27. Rounding to three decimal places: 0.269. Let's check if there is an alternative FFO definition. Sometimes FFO = EBITDA - Interest - Taxes. EBITDA can be approximated from Operating Profit + D&A. Operating Profit (Profit Loss From Operating Activities) = 533,800,000. Add D&A = 667,100,000. EBITDA = 1,200,900,000. This is extremely close to the "Cash Flows From Used In Operations Before Changes In Working Capital" (1,202,000,000). The difference is likely due to provisions and other non-cash items. So, FFO ~ 1,202,000,000 is a very solid number. Denominator: Net Debt. If we use the balance sheet date 2023-01-01 (end of 2022): Net Debt = 4,474,000,000 (with leases) or 4,397,600,000 (without). Common practice for "Net Debt" in ratios like FFO/Net Debt often includes lease liabilities for capital-intensive industries like utilities. Result: 0.2687. If I must choose one, 0.27 is a safe rounded answer. If more precision is required, 0.269. Let's try one more check. Is "Current Derivative Financial Liabilities" part of debt? Current Derivative Financial Liabilities: 1,347,600,000. Noncurrent Derivative Financial Liabilities: 6,300,000. These are huge. But they are derivatives, not debt principal. They are excluded from Net Debt. Final decision: Use FFO = 1,202,000,000 and Net Debt (including leases) = 4,474,000,000. Ratio = 0.26866... 0.27