Buffett has said that he will generally pay 7x EV/EBIT for a good business that is growing 8-10% per year.
- The market capitalization is the market value of the common shareholders’ equity equals to number of shares multiply by share price.
- The debts is the market value of interest bearing bank loans, bonds, commercial papers etc. In financial solid businesses the market value of debt corresponds to its book value.
- Minority interest is the result of the consolidation of the subsidiary company’s account and it doesn’t belong to the common shareholders of the company. The market value of MI is obtained by multiplying its book value by an appropriate price-to-book value.
- Cash and cash equivalents are deducted from the enterprise value as they lower the purchase price. They can be distributed or used for the reduction of debts in an acquisition.
- The other non-operating assets are treated in a similar way, as they can be sold without impacting the cash flow situation, for example properties, investments in associates etc.
For individual cases, I will be happy to invest in a company with normal growth rate of say 8% with TEV/Ebit < 7, following Warren Buffett's metric. Flip it over, we get an earnings yield for the enterprise of 14%, or an after tax earnings yield of 11%., which I am satisfied of.