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“ENTERPRISE VALUE”-ALL YOU NEED TO KNOW-COMPILED BY ER. AVINASH KULKARNI

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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