Enterprise Value

[MrChow]

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?

 

[galumay]

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.

 

[Value Collector]

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?

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

 

[galumay]

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/

 

[MrChow]

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