Saturday Brain Storming Thought (135) 16/10/2021
COMPILED BY ER. AVINASH KULKARNI
ENTERPRISE VALUE
Enterprise value (EV) is a measure of a company’s total value, often used as a more comprehensive alternative to equity market capitalization
It is a sum of claims by all claimants, creditors, and shareholders
Enterprise value is a popular metric used to value a company for a potential takeover
Formula and calculation of EV
EV = MC + Total Debt – C
MC = Market capitalization, ie current stock price multiplied by the number of outstanding stock shares
Total Debt = sum of short-term and long-term debt
C = cash and cash equivalent ie the liquid assets of a company, but may not include marketable securities
Good Enterprise Value
EV / EBITDA value below 10
EBITDA
Earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio
Amortization
It is the action or process of gradually writing off the initial cost of an asset
Increasing the Enterprise Value of your business
Objectives
1) identify key indicators that can add value to your business
2) develop tools to measure your key indicators
3) create strategies to optimize your key indicators
Key Indicators of Profit
1) gross margin
2) operating profit
3) profit before taxes
4) net profit
5) return on assets
6) return on equity
7) EBITDA
Key indicators of Process
1) quality ratio
2) time to market
3) sales per employee
4) inventory turns
5) A/R collection days
6) output ratio
7) shipment linearity
Key indicators of People
1) turnover
2) productivity
3) loyalty
4) ROI
5) capabilities
Sale strategies for profit creation
1) sell more to existing customers
2) sell to new customers
3) offer discounts
4) rebates
5) relax credit policies
Expense Strategies for profit creation
1) reduce workforce
2) reduce advertising expenses
3) Reduce T & E expenses
4) reduce training costs
Deduction of cash from enterprise value
Cash is the most liquid asset in a company’s statement
Cash is deducted from EV because it will reduce the acquiring costs of the target company
It is assumed that the acquire will use the cash
A company with more debt than cash will have an enterprise value greater than its market capitalization
Net Enterprise Value
It is the value of the debtors assets less all liabilities of the debtor, excluding any claims
Negative Enterprise Value
It means that a company has more cash than it would need to pay off any debt and buy back all its stocks in one go, if it really wanted to
Importance of Enterprise Value
1) it tells us about the worth of the company ie it’s a theoretical take over price
2) it represents the economic value of a company
3) it is a theoretical takeover price of a company is to be bought as it accounts for the debt as well as the cash that the acquirer would pocket in the transaction
4) it helps in comparing companies of different capital structures
5) returns from different businesses can be compared to the ones interested in buying controlling stakes
6) for the stock market investors it is used to neutralize the risks and accordingly compare the return expected
Good Enterprise Value Revenue
EV / Sales ratios range between 1 and 3
Implied Enterprise Value
It is the value that you believe the company’s net operating assets should be worth to all investors
Fair Enterprise Value
It means the most recent valuation of the enterprise value of the operator as determined in accordance with the valuation procedure
Compiled by:-
Er. Avinash Kulkarni
Chartered Engineer
Govt Regd Valuer
IBBI Regd Valuer
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