Enterprise Value (EV)

DEFINITION OF 'ENTERPRISE VALUE (EV)'
Enterprise Value, or EV for short, is a measure of a company's total value, often used as a more comprehensive alternative to equity market capitalization. The market capitalization of a company is simply its share price multiplied by the number of shares a company has outstanding. Enterprise value is calculated as the market capitalization plus debt, minority interest and preferred shares, minus total cash and cash equivalents. Often times, the minority interest and preferred equity is effectively zero, although this need not be the case.

EV = market value of common stock + market value of preferred equity + market value of debt + minority interest - cash and investments.


INVESTOPEDIA EXPLAINS 'ENTERPRISE VALUE (EV)'
Enterprise value can be thought of as the theoretical takeover price if the company were to bought. In the event of such a buyout, an acquirer would generally have to take on the company's debt, but would pocket its cash for itself. EV differs significantly from simple market capitalization in several ways, and many consider it to be a more accurate representation of a firm's value.

The value of a firm's debt, for example, would need to be paid by the buyer when taking over a company, thus enterprise value provides a much more accurate takeover valuation because it includes debt in its value calculation.


ENTERPRISE VALUE AS AN ENTERPRISE MULTIPLE
Enterprise multiples that contain enterprise value relate the total value of a company as reflected in the market value of its capital from all sources to a measure of operating earnings generated, such as EBITDA.

EBITDA = recurring earnings from continuing operations + interest + taxes + depreciation + amortization
The Enterprise Value/EBITDA multiple is positively related to the growth rate in free cash flow to the firm (FCFF) and negatively related to the firm's overall risk level and weighted average cost of capital (WACC).



EV/EBITDA is useful in a number of situations:

The ratio may be more useful than the P/E ratio when comparing firms with different degrees of financial leverage (DFL).
EBITDA is useful for valuing capital-intensive businesses with high levels of depreciation and amortization.
EBITDA is usually positive even when earnings per share (EPS) is not.


EV/EBITDA also has a number of drawbacks, however:

If working capital is growing, EBITDA will overstate cash flows from operations (CFO or OCF). Further, this measure ignores how different revenue recognition policies can affect a company's CFO.

Because free cash flow to the firm captures the amount of capital expenditures (CapEx), it is more strongly linked with valuation theory than EBITDA. EBITDA will be a generally adequate measure if capital expenses equal depreciation expenses.

Another commonly used multiple for determining the relative value of firms is the enterprise value to sales ratio, or EV/Sales. EV/sales is regarded as a more accurate measure than the Price/Sales ratio since it takes into account the value and amount of debt a company has, which needs to be paid back at some point. Generally the lower the EV/sales multiple the more attractive or undervalued the company is believed to be. The EV/sales ratio can actually be negative at times when the cash held by a company is more than the market capitalization and debt value, implying that the company can essentially be buy itself with its own cash.



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Which company is cheaper? (Understanding P/E, Earnings yield and EBIT/EV.)

Consider two companies, Company A and Company B.

They are actually the same company (i.e. the same sales, the same operating earnings, the same everything) except that Company A has no debt and Company B has $50 in debt (at a 10% interest rate).

All information is per share

Company A

Sales                     $100
EBIT                         10
Interest expense          0
Pretax Income           10
Taxes @ 40%             4
Net Income               $6


Company B

Sales                     $100
EBIT                         10
Interest expense           5
Pretax Income             5
Taxes @ 40%             2
Net Income               $3


The price of Company A is $60 per share.
The price of Company B is $10 per share.

Which is cheaper?

P/E of Company A is 10 ($60/6 = 10).  The E/P or earnings yield, of Company A is 10% (6/60).
P/E of Company B is 3.33 ($10/3 = 3.33). The E/P or earnings yield of Company B is 30% (3/10).

So which is cheaper?
Using P/E and earnings yield, Company B looks much cheaper than Company A.

So, is Company B clearly cheaper?


Let's look at EBIT/EV for both companies.

Company A
Enterprise value (Market price + debt)   60 + 0 = $60
EBIT   $10


Company B
Enterprise value (Market price + debt)   10 + 50 = $60
EBIT   $10

They are the same! Their EBIT/EV are the same.

To the buyer of the whole company, would it matter whether you paid $10 per share for the company and owed another $50 per share or you paid $60 and owed nothing?

It is the same thing!

*You would be buying $10 worth of EBIT for $60, either way!




Additional note:

* For example, whether you pay $200k for a building and assume a $800k mortgage or pay $1 million up front, it should be the same to you.  The building costs $1 million either way!

[Using EBIT/EV as your earnings yield provide a better picture than E/P, of how cheap or expensive the asset is.]

Pretax operating earnings or EBIT (earnings before interest and taxes) was used in place of reported earnings because companies operate with different levels of debt and differing tax rates. Using EBIT allowed us to view and compare the operating earnings of different companies without the distortions arising from the differences in tax rates and debt levels.  For each company, it was then possible to compare actual earnings from operations (EBIT) to the cost of the assets used to produce those earnings (tangible capital employed) and to the price you are paying.

Returns on Capital
= EBIT / (Net Working Capital + Net Fixed Assets)

Earnings Yield
= EBIT / EV
= EBIT / Enterprise Value

As an investor, you are looking for companies with high Returns on Capital and selling for a bargain or high Earnings Yield (EBIT / EV).

REF:  The Little Book that still Beats the Market by Joel Greenblatt

Enterprise Value

What It Is:

Enterprise value represents the entire economic value of a company. More specifically, it is a measure of the theoretical takeover price that an investor would have to pay in order to acquire a particular firm.

How It Works/Example:

Enterprise value is calculated as follows:

Market Capitalization + Total Debt - Cash = Enterprise Value

Some analysts adjust the debt portion of this formula to include preferred stock; they may also adjust the cash portion of the formula to include various cash equivalents such as current accounts receivableand liquid inventory.

For example, let's assume Company XYZ has the following characteristics:

Shares Outstanding: 1,000,000
Current Share Price:  $5
Total Debt:  $1,000,000
Total Cash:  $500,000

Based on the formula above, we can calculate Company XYZ's enterprise value as follows:

($1,000,000 x $5) + $1,000,000 - $500,000 = $5,500,000

[InvestingAnswers Feature: Financial Statement Analysis For Beginners]

Why It Matters:

When attempting to gauge the overall value Wall Street has assigned to a firm, investors often look exclusively at market capitalization (calculated by multiplying the number of outstanding shares by the current share price). However, in most cases this is not an accurate reflection of a company's true value.

Enterprise value considers much more than just the value of a company's outstanding equity. To buy a company outright, an acquirer would have to assume the acquired company's debt, though it would also receive all of the acquired company's cash. Acquiring the debt increases the cost to buy the company, but acquiring the cash reduces the cost of acquiring the company.

Debt and cash can have an enormous impact on a particular company's enterprise value. For this reason, two companies with the same market capitalizations may sport very different enterprise values. For example, a company with a $50 million market capitalization, no debt, and $10 million in cash would be cheaper to acquire than the same $50 million company with $30 million of debt and no cash.

The P/E ratio and other formulas commonly used to measure value don't typically take cash and debt into consideration. For this reason, it's sometimes called the "flawed P/E ratio." To get a better sense for a company's true valuation, many analysts and investors prefer to compare earnings, sales, and other measures to enterprise value.

To learn more about how enterprise value is used by investors, don't miss our two top articles on the subject: The Best Alternative to the Flawed P/E Ratio and With This Ratio, Cash Flows Are King.

http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/enterprise-value-806

Enterprise Multiple = EV / EBITDA

What It Is:

Enterprise multiple is a financial indicator used to determine the value of a company. It is equal to a company’s enterprise value divided by its EBITDA (Earnings Before Interest, Taxes, Depreciation andAmortization).

How It Works/Example:

The enterprise multiple has many uses. In addition to helping investors determine if a company is over- or undervalued, it is also used by analysts to examine companies during the due diligence process that precedes a potential acquisition.

To determine the enterprise multiple, you much first find the company's enterprise value (market capitalization + value of debt, minority interest, and preferred shares - value of cash and cash equivalents). Once you know the company's EV, simply divide by the company's EBITDA.

Enterprise Multiple = EV/EBITDA

A company with a low enterprise multiple is considered to be an attractive takeover candidate (and investment), because it reflects a low price for the value of the company (more company for your dollar).  Enterprise multiples are compared to other companies within the same industry and not across industries in order to obtain an insightful assessment.

Why It Matters:

The enterprise multiple ratio is considered a more accurate barometer of the firm's value than the price-to-earnings (P/E) ratio since it discounts various countries taxing policies and takes into account debt and cash on hand. The enterprise multiple provides a more accurate insight into the company as it provides the acquirer with better information about the company's prospects and will prevent the acquirer from overpaying as well as avoid a potentially inferior acquisition.

http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/enterprise-multiple-625

Market capitalization versus Enterprise Value

Market capitalization = What the equity of the company is worth.

Enterprise value = What the company (or company's asset) is worth.

Enterprise Value

5 Companies You Can Buy Today

By Morgan Housel
July 6, 2012

There are many ways to value a company. Price to earnings. Price to cash flow. Liquidation value. Price per eyeballs on website. Price to a number I made up (this one never gets old). Price to CEO's ego divided by lobbying activity as a percentage of revenue (this one doesn't get used enough).

Which one is best? They're all limited and reliant on assumptions. No single metric holds everything you need to know.

The metric I'm using today is no different. But it's perhaps the most encompassing, and least susceptible to hidden complexities of a company's financial statements. The more I think about it, the more I feel it's one of the most useful metrics out there.

What is it? Enterprise value over unlevered free cash flow.                                                       

• Enterprise value is market capitalization (share price times shares outstanding) plus total debt and minority interests, minus cash.
• Unlevered cash flow is free cash flow with interest paid on outstanding debt added back in.

The ratio of these two statistics provides a valuation metric that takes into consideration allproviders of capital -- both stockholders and bondholders.

But you invest in common stock, so why should you care about bondholders? Ask Lehman Brothers investors why. When a company earns money, it has to take care of bondholders before you, the common shareholder, get a dime. Focusing solely on profits and equity can be misleading.

Enterprise value provides a more encompassing view. By bringing debt capital into the situation, we see real earnings in relation to the company's entire capital structure. If you owned the entire business, this is the metric you'd naturally gravitate toward.

Using this metric, here are five companies I found that look attractive.

Company	Enterprise Value/Unlevered FCF	5-Year Average	CAPS Rating (out of 5)
Google (Nasdaq: GOOG  )	18.1	35.2	****
Johnson & Johnson(NYSE: JNJ  )	19.8	21.9	*****
Procter & Gamble (NYSE:PG  )	24.6	28.4	*****
UnitedHealth Group(NYSE: UNH  )	6.9	10.2	*****
Colgate-Palmolive (NYSE:CL  )	22.8	24.4	*****

Source: S&P Capital IQ.

Let's say a few words about these companies.

Three years ago, Warren Buffett and Charlie Munger had some flattering words for Google. "Google has a huge new moat. In fact I've probably never seen such a wide moat." Munger said. "I don't know how to take it away from them," Buffett said. "Their moat is filled with sharks!" Munger added.

Here's a good example: After trying to make inroads in the online ad business, Microsoft just wrote down almost the entire value of its 2007 purchase of aQuantive. The Daily Beast summed it up well: "Microsoft's $6.2 Billion Writedown Shows It's Losing War With Google."

I still like Microsoft because it's good at what it does. But advertising and search isn't it. That's Google's turf. And today you can buy Google at literally the lowest price-to-cash-flow ratio ever. Take advantage of that while it lasts.

Johnson & Johnson is one of the best-performing stocks over the last several decades. But it's having a rough go of it lately. Recalls, management blunders, more recalls, competition from generics... and on and on. Yes, growth has slowed. Yes, it might stay slow for a while. But valuation more than compensates for that. The stock currently provides a 3.6% dividend yield, and trades for 12 times next year's earnings -- below the market average. It's a good company at a good price.

Procter & Gamble is a similar story. One of the world's greatest collections of brands has hit a slowdown. That's hit shareholder returns -- P&G shares haven't budged in two years. But most of the company's missteps appear to be tied to poor execution by management. My guess: Within a year or two the company will have a new CEO, and the market will come to appreciate its value anew.

Everything important you need to know about UnitedHealth Group comes down to the Affordable Care Act, also known as Obamacare. Most health insurance companies currently trade at depressed valuations, likely because the market hates uncertainty -- something that still exists even after the Supreme Court ruled Obamacare constitutional.

But what are the two most likely outcomes here? One is that Obamacare remains law, in which case insurers will face a raft of costly new rules, but also a flood of new customers essentially mandated to buy their product. The other is that Obamacare is repealed -- likely under a Romney administration -- in which case those costly new rules would go away. Neither outcome seems particularly bad for insurers.

Past performance is no guarantee of future returns, but I can't help but point out how successful Colgate-Palmolive has been over the last 30 years. The toothpaste and soap company has produced average returns of nearly 17% a year since 1980, compared with 11% for the broader market. That's the power of two forces: A strong brand, and simple products that aren't pushed to extinction by new technology. Combine that with a pretty reasonable valuation, and Colgate-Palmolive should be a great company to own for years to come.

http://www.fool.com/investing/general/2012/07/06/5-companies-you-can-buy-today.aspx

What is EV / EBITDA?

Enterprise Value

What It Is:

Enterprise value represents the entire economic value of a company. More specifically, it is a measure of the theoretical takeover price that an investor would have to pay in order to acquire a particular firm.


How It Works/Example:

Enterprise value is calculated as follows:

Market Capitalization + Total Debt - Cash = Enterprise Value

Some analysts adjust the debt portion of this formula to include preferred stock; they may also adjust the cash portion of the formula to include various cash equivalents such as current accounts receivable and liquid inventory.

For example, let's assume Company XYZ has the following characteristics:

Shares Outstanding: 1,000,000
Current Share Price: $5
Total Debt: $1,000,000
Total Cash: $500,000

Based on the formula above, we can calculate Company XYZ's enterprise value as follows:

($1,000,000 x $5) + $1,000,000 - $500,000 = $5,500,000



Why It Matters:

When attempting to gauge the overall value Wall Street has assigned to a firm, investors often look exclusively at market capitalization (calculated by multiplying the number of outstanding shares by the current share price). However, in most cases this is not an accurate reflection of a company's true value.

Enterprise value considers much more than just the value of a company's outstanding equity. To buy a company outright, an acquirer would have to assume the acquired company's debt, though it would also receive all of the acquired company's cash. Acquiring the debt increases the cost to buy the company, but acquiring the cash reduces the cost of acquiring the company.

Debt and cash can have an enormous impact on a particular company's enterprise value. For this reason, two companies with the same market capitalizations may sport very different enterprise values. For example, a company with a $50 million market capitalization, no debt, and $10 million in cash would be cheaper to acquire than the same $50 million company with $30 million of debt and no cash.

The P/E ratio and other formulas commonly used to measure value don't typically take cash and debt into consideration. For this reason, it's sometimes called the "flawed P/E ratio." To get a better sense for a company's true valuation, many analysts and investors prefer to compare earnings, sales, and other measures to enterprise value.

To learn more about how enterprise value is used by investors, don't miss our two top articles on the subject: The Best Alternative to the Flawed P/E Ratio and With This Ratio, Cash Flows Are King.


http://www.investinganswers.com/term/enterprise-value-806

****Investment Valuation Ratios

This ratio analysis tutorial looks at a wide array of ratios that can be used by investors to estimate the attractiveness of a potential or existing investment and get an idea of its valuation.

However, when looking at the financial statements of a company many users can suffer from information overload as there are so many different financial values. This includes revenue, gross margin, operating cash flow, EBITDA, pro forma earnings and the list goes on. Investment valuation ratios attempt to simplify this evaluation process by comparing relevant data that help users gain an estimate of valuation.

For example, the most well-known investment valuation ratio is the P/E ratio, which compares the current price of company's shares to the amount of earnings it generates. The purpose of this ratio is to give users a quick idea of how much they are paying for each $1 of earnings. And with one simplified ratio, you can easily compare the P/E ratio of one company to its competition and to the market.

The first part of this tutorial gives a great overview of "per share" data and the major considerations that one should be aware of when using these ratios. The rest of this section covers the various valuation tools that can help you determine if that stock you are interested in is looking under or overvalued.

Table of Contents

1) Investment Valuation Ratios: Introduction

2) Investment Valuation Ratios: Per Share Data

3) Investment Valuation Ratios: Price/Book Value Ratio

4) Investment Valuation Ratios: Price/Cash Flow Ratio

5) Investment Valuation Ratios: Price/Earnings Ratio

6) Investment Valuation Ratios: Price/Earnings To Growth Ratio

7) Investment Valuation Ratios: Price/Sales Ratio

8) Investment Valuation Ratios: Dividend Yield

9) Investment Valuation Ratios: Enterprise Value Multiple

Enterprise Value

Comparator analysis (sometimes called comparison company analysis) is a relative valuation approach. For $IBM we looked at four peer companies – Accenture ($ACN), HP ($HPQ), Microsoft ($MSFT) and Oracle ($ORCL). We calculated enterprise values – market capitalisation plus net debt (long-term borrowings less cash). Then we measured a range of metrics against the enterprise value for $IBM and the peer set.

We have used the last financial year (LFY) as the base set of metrics. $IBM has not yet released the 2008 LFY profitability (EBIT and EBITDA) and free cash flow results. For this analysis we have used the 2008 revenue numbers with the 2007 profitability and free cash flow margins. The highlighted column links our DCF valuation to the current market valuation.

$IBM is currently trading in the middle to the upper-end of the valuation metrics of the peer group. Our DCF valuation places a value on $IBM well above where the market is currently valuing the company and the peer group. Reviewing our assumptions we remain comfortable with our valuation. Using the DCF valuation approach we believe that $IBM is trading at a discount to intrinsic value. The market is definitely voting negative – but in the long-run we believe $IBM represents value at current prices.

http://blog.valuecruncher.com/2009/01/running-the-numbers-ibm-ibm-still-undervalued-after-strong-result/

EV to EBITDA

http://pennysleuth.com/investing-in-the-railroad-industry/

Enterprise Value

Enterprise Value

Enterprise value (EV) is a company’s market capitalization plus net interest-bearing debt.


In other words, it is the amount of cash required to buy the company at its current price and retire all interest-bearing debt less the cash assets of the business.

EV = Market Capitalization + Net interest-bearing Debt

or

EV = Market Capitalization + Borrowings - Cash


Although used for various reasons by stock analysts, the only useful purpose for calculating EV is as a tool to determine the maximum price a company is prepared to pay to acquire another business.


For instance, one company had a policy of limiting the EV it was prepared to pay to an EBIT multiple of 5. So if EBIT was $20 million, EV should be no more than $100 million. If interest-bearing debt happened to be $50 million, then $50 million would be the maximum price it would pay for the equity of the business.


EV = Market Capitalization + Borrowings - Cash
$100m = Market Capitalization + $50m - $0
Market Capitalization = $100 m - $50 m + $0 = $50 m



-----

Let’s see the ROE on the acquisition cost of $50 million.


Acquisition cost = $50 million. Calculate ROE


EBIT = $20 m
Interest-bearing debt = $50 m
Interest cost of 8 percent on the debt
Corporate tax rate = 30 percent


Interest cost = $50 m x 8 percent = $4 m


Post-tax profit = EBIT x (100 percent – Corporate tax rate) = [($20 m - $4 m) x (70 percent)] = $11.2 m


ROE = ($11.2 m/ $50 m) = 22.4 percent on an equity cost of $50 million.

-----



If the company to be acquired had no debt and
acqusition cost was $50 million:



Interest-bearing debt = $ 0
Post-tax profit = EBIT x 70 percent = $20 million x 70 percent = $14 million
Return on cost of $100 million would be 14 percent.


The acquired company would then be geared up by borrowing $50 million.
Interest cost = $50 m x 8 percent = $4 m


Post-tax profit = EBIT x (100 percent – Corporate tax rate) = (20m – 4m) x (70 percent) = $11.2 m


ROE = $11.2m / $50m = 22.4 percent return on the net $50 million acquisition cost.

-----



EBIT multiple and ROE


From the examples above:

EV = EBIT x EBIT multiple
EBIT multiple = EV/EBIT

EBIT multiple of 5 produces a ROE of 22.4 percent.


Determine the EBIT multiple beyond which debt of 8 percent would produce a return (ROE) of less than 8 percent.
Answer: 1 / (8 percent) = 12.5


Therefore,

Paying an EBIT multiple MORE THAN 12.5, produces Return on Equity (ROE) LESS THAN the interest cost of debt of 8 percent.

Paying an EBIT multiple LESS THAN 12.5, produces Return on Equity (ROE) MORE THAN the interest cost of debt of 8 percent.

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Also read:

http://www.horizon.my/2008/12/malaysian-airlines-is-mas-cheaper-than-air-asia/
Malaysian Airlines – Is MAS Cheaper than Air Asia?