Enterprise Value

• 28 February 2017

• #1

M

MrChow

Joined

5 October 2016

Posts

266

Reactions

240

EV = Market Cap + Total Debt - Cash.

I was wondering why Accounts Recievable and Accounts Payable aren't included (apart from accounting reasons)?

EG. If your EV is $100m, but your Accounts Recievable - Accounts Payable is $101m, that means your future incoming cash flow (if the business is sold or closed) will be worth more than the EV.

Thoughts?

 

• 28 February 2017

• #2

galumay

learner

Joined

17 September 2011

Posts

3,661

Reactions

2,541

Its just another formula I think, I use it as part of my analysis and look at EV/NPAT ratio, if you know what the market ratio is overall its a quick and dirty number to look at in comparison to other businesses.

 

• 2 March 2017

• #3

Value Collector

Have courage, and be kind.

Joined

13 January 2014

Posts

12,489

Reactions

8,847

MrChow said:

EV = Market Cap + Total Debt - Cash.

I was wondering why Accounts Recievable and Accounts Payable aren't included (apart from accounting reasons)?

EG. If your EV is $100m, but your Accounts Recievable - Accounts Payable is $101m, that means your future incoming cash flow (if the business is sold or closed) will be worth more than the EV.

Thoughts?

Click to expand...

I would use the net debt figure, which would include accounts receivable and payable.

 

• 2 March 2017

• #4

galumay

learner

Joined

17 September 2011

Posts

3,661

Reactions

2,541

Wouldnt net debt include cash? I have only ever seen the calculation done with total debt - but then I havent really looked at many other definitions of EV.

EDIT - here is a link which answers the question indirectly - and suggests some more complexity be added to the traditional calculation of EV.

https://valueandopportunity.com/2012/07/03/how-to-correctly-calculate-enterprise-value/

 

• 2 March 2017

• #5

M

MrChow

Joined

5 October 2016

Posts

266

Reactions

240

Thanks for the discussion and links to those, exactly what I was looking for.

I've settled on using NPAT / MarketCap + Net Debt + Deferred Consideration.

(those are the relevent items to the companies I was researching, probably will find more to add).

Also if anyone is interested using that formula my estimate for the cheapest quintile is approximately <12.5