Posted by Intelligent Investor > 2015-10-19 14:47 | Report Abuse

Hi Mr. Chong,

Some companies include the return from investment in the EBIT.

If TEV = Market Capitalization + Debt + Minority Interest - Cash – other non-operating assets

I think it might be a better idea to use the Operating Profit (we might need to dissect the income statement to get this figure) which exclude all profit from the non operating asset to get the Acquirer’s Multiple

I would suggest to make use this equation - Acquirer’s Multiple = TEV/Operating Profit

Posted by Intelligent Investor > 2015-10-19 14:49 | Report Abuse

Mr. Chong,

I have another question.

TEV = Market Capitalization + Debt + Minority Interest - Cash – other non-operating assets

Why take the total cash instead of excess cash only?

I am using this equation - TEV = Market Capitalization + Long Term Debt + Minority Interest - Excess Cash – other non-operating assets

Posted by Intelligent Investor > 2015-10-19 14:56 | Report Abuse

And, the definition of my Excess Cash is not the working capital, but Excess Cash = Total Cash – MAX(0,Current Liabilities-(Current Assets-Cash))

Posted by Intelligent Investor > 2015-10-19 15:02 | Report Abuse

E.g. PTARAS - I need to dissect the income items based on financial note (7) and compute the pure "Operating Profit"


#financial note (7) is available at page56 of PTARAS AR 2015 (http://www.klse.my/staticFile/371065.jsp)

Posted by kcchongnz > 2015-10-19 15:05 | Report Abuse

II,

Yes, many companies have some non-operating profit such as dividend income, interest income etc in their "Operating income". It could be the accounting rule for companies with a lot of cash and share investments.

What we can do is look at what they are, maybe from the cash flow from operating activities, and exclude them from operating income to do our other analysis such as DCFA, or comparing with other companies.

You can use your formula,

Excess Cash = Total Cash – MAX(0,Current Liabilities-(Current Assets-Cash))

But replace then with non-cash current liabilities and non-cash current assets.

that will avoid double counting in your cash and debts.

Ultimately, you will arrive the same answer as mine.

Posted by NOBY > 2015-10-19 15:12 | Report Abuse

KC, thank you. This example is very clear and makes sense.

Posted by angiegoh > 2015-10-19 15:32 | Report Abuse

Thanks for sharing KC.

We want to subtract excess cash from the Enterprise Value because the portion of total cash needed to cover current liabilities is an investment in the company.

Excess Cash = Total Cash – MAX(0,Current Liabilities - (Current Assets - Total Cash))

Excess Cash = Total Cash - MAX (0, Current Liabilities - Current Assets + Total Cash)

So, fundamentally, what is the difference between your EV and my proposed EV?

We want excess cash to be a positive number. Therefore, we guard against this by putting a maximum of 0 on the value to subtract from cash.

I am keen to learn and use the right one.

Posted by NOBY > 2015-10-19 15:39 | Report Abuse

"We want excess cash to be a positive number. Therefore, we guard against this by putting a maximum of 0 on the value to subtract from cash."

The maximum of 0 is not to guarantee excess cash >0. It actually ensures that Excess cash never exceeds total cash. It is a way to conservatively estimate excess cash since it will not consider any the residual value of net working capital and add it back to cash.

The enterprise value calculation should be based total cash and equivalents instead of excess cash. I realized this now because in the excess cash calculation, short term debt is included in the computation hence you are double counting if you also include short term debt in the enterprise value equation.

Posted by Intelligent Investor > 2015-10-19 15:43 | Report Abuse

Hi Mr. Chong

I am getting the non cash CA with Current Assets-Cash.

And, what's non-cash current liabilities?

Posted by kcchongnz > 2015-10-19 15:55 | Report Abuse

Posted by Intelligent Investor > Oct 19, 2015 03:43 PM | Report Abuse

Hi Mr. Chong

I am getting the non cash CA with Current Assets-Cash.

And, what's non-cash current liabilities?


It is total current liabilities - short-term debt

Short-term debt is already in "Total debt" in the EV formula

Posted by Intelligent Investor > 2015-10-19 16:05 | Report Abuse

Hi. Mr Chong,

Thanks.

If this is the case, I think I can remain my current equation. Because I prefer to minus it out to checkout how much is the "real" Excess Cash and what is the % of Excess Cash on the Total Asset and Market Cap.

By doing so, I only take in the Long Term Debt on TEV. Where, TEV = Market Capitalization + Long Term Debt + Minority Interest - Excess Cash – other non-operating assets

Posted by choop818 > 2015-10-19 17:05 | Report Abuse

Any improvements to normal p/e is most welcome.

Posted by kcchongnz > 2015-10-19 17:18 | Report Abuse

Posted by angiegoh > Oct 19, 2015 03:32 PM | Report Abuse
Thanks for sharing KC.
We want to subtract excess cash from the Enterprise Value because the portion of total cash needed to cover current liabilities is an investment in the company.
Excess Cash = Total Cash – MAX(0,Current Liabilities - (Current Assets - Total Cash))
Excess Cash = Total Cash - MAX (0, Current Liabilities - Current Assets + Total Cash)
So, fundamentally, what is the difference between your EV and my proposed EV?
We want excess cash to be a positive number. Therefore, we guard against this by putting a maximum of 0 on the value to subtract from cash.
I am keen to learn and use the right one.

Angiegoh,
Noby has answered your question well. I just want to add here.

Forget about this formula of excess cash. It will confuse you. Use the intuitive EV formula as

TEV = Market Capitalization + Debt + Minority Interest - Cash – other non-operating assets

And the explanation in my article here.

The "excess cash" in your formula will give you a maximum of the cash or cash equivalent in the balance sheet, and no more.

Most if not all companies require a positive net working capital for its business, otherwise it will have liquidity risk. Net positive working capital is required in its operating assets. So you can't "extract" any more cash from there.

Mind you, we are talking about EV, not liquidation value.

Posted by JT Yeo > 2015-10-19 17:53 | Report Abuse

Hi Angie,

Ill breakdown your formula, I will exclude minority interest and preferred to make it cleaner.

EV = Market Cap + Borrowings - [Excess cash]
EV = Market Cap + Borrowings - [Net working capital]
EV = Market Cap + Borrowings - [Current assets - current liabilities]
EV = Market Cap + Borrowings - [Development cost + Inventories + Receivables + Cash & bank balances - Borrowings - Trade payables - Dividend payables - Tax liabilities]

You see your formula is adding borrowings and minus borrowings again. Another thing is EV = Operating assets when you refer to the pictorial above. In some ways, you are double counting many things and canceling things off like borrowings.

Posted by angiegoh > 2015-10-19 18:20 | Report Abuse

Well done and thanks JT, Noby, and Kc! It could not be clearer now.

One last question: why subtract other non-operating assets in EV calculation?

Posted by JT Yeo > 2015-10-19 19:32 | Report Abuse

Because they are 'non-operating'. As Toby said, just like those excess cash, something that can be redeployed if necessary without jeopardising daily operations of the business.

Posted by angiegoh > 2015-10-19 20:00 | Report Abuse

So, this is final:

EV = Market Capitalization + Debt + Minority Interest - Cash – Other Non-Operating assets

I can't tell that how much I enjoyed the discussion and argument, which both turned out to be fruitful and useful.

Long value investing.

Posted by paperplane2 > 2015-10-19 20:04 | Report Abuse

Simple mah, EV is calculated from the point of view you wanna sell away company. Normally ppl will sell debts together,and also keep non relating business. Cash deducted as after takeover ppl take cash , so it act as contra

Posted by Icon8888 > 2015-10-19 20:08 | Report Abuse

Don't know what you talking

Posted by globalvalueinvestor > 2015-10-20 00:24 | Report Abuse

Hi Angie, I will suggest you please change all your posts valuation as it mislead people on executing a non official calculation. Thank you so much and very much appreciate your effort. Please keep it up, would love to see more of your posts.

Posted by kircheis > 2015-10-20 13:45 | Report Abuse

Interesting discussion, really appreciate you all for the sharing. It is blogs and discussion like this which attract me to here.

Posted by Chin Pin Tan > 2015-10-20 14:27 | Report Abuse

"For individual cases, I will be happy to invest in a company with normal growth rate of say 8% with TEV/Ebit<7, following Warren Buffet’s metric. Flip it over, we get an earnings yield for the enterprise of 14%, or an after tax earnings yield of 11%, which I am satisfied of."

Hi KC, is the benchmark of TEV/EBIT<7 apply for all companies? Are there any industries benchmark?

Thank you!

Posted by paperplane2 > 2015-10-20 14:56 | Report Abuse

EV = Market Capitalization + Debt + Minority Interest - Cash – Other Non-Operating assets

whether to include Other Non-Operating assets is arguable. if tht assets can sell together, then include.

Posted by Chin Pin Tan > 2015-10-20 14:57 | Report Abuse

And one more qusetion, the growth rate 8% referring to revenue?EBIT?PAT?EPS?

Posted by valuelurker > 2015-10-20 15:05 | Report Abuse

It amazes me how widespread the use of EBITDA has become. People try to dress up financial statements with it.

We won't buy into companies where someone's talking about EBITDA. If you look at all companies, and split them into companies that use EBITDA as a metric and those that don't, I suspect you'll find a lot more fraud in the former group. Look at companies like Wal-Mart, GE and Microsoft -- they'll never use EBITDA in their annual report.

People who use EBITDA are either trying to con you or they're conning themselves. Telecoms, for example, spend every dime that's coming in. Interest and taxes are real costs."

Source: Berkshire Hathaway Annual Meeting 2002 Tilson Notes

Time: 2002

Posted by kcchongnz > 2015-10-20 15:41 | Report Abuse

Posted by Chin Pin Tan > Oct 20, 2015 02:27 PM | Report Abuse
"For individual cases, I will be happy to invest in a company with normal growth rate of say 8% with TEV/Ebit<7, following Warren Buffet’s metric. Flip it over, we get an earnings yield for the enterprise of 14%, or an after tax earnings yield of 11%, which I am satisfied of."

Hi KC, is the benchmark of TEV/EBIT<7 apply for all companies? Are there any industries benchmark?


It is a good benchmark as explained in the statement. But in investing, nothing is cast in stone.

Posted by citychew_1886 > 2015-10-21 03:48 | Report Abuse

Hi KC , if someone is not so good in calculation and use the formula you teach above ,do you think that we can use the ratio of return of equity (ROE)and combine with PE ratio to make it simple ?

Posted by miketyu > 2015-10-21 20:55 | Report Abuse

Mind to highlight what are classified as non operating assets?

Posted by miketyu > 2015-10-21 21:29 | Report Abuse

Why operating profit is used instead of earning before income tax for ebit? I'm a bit lost here

Posted by Chin Pin Tan > 2015-10-21 21:40 | Report Abuse

Hi Miketyu, non operating assets are the assets not related to the business operation, such as investment in associate company. We have to minus it when we calculate the TEV.

ebit is the short form of earning before interest and tax (not the earning before income tax), which is equivalent to the operating profit.

We usually use operating profit (or ebit) to assess whether the company is doing well in its operating activities.

Hope the above explanation is useful for you.

Posted by miketyu > 2015-10-21 21:57 | Report Abuse

Yes you have answered my questions. Thank you.

Posted by natelietan > 2016-02-26 11:20 | Report Abuse

hi kcchongnz

may i know where did you get the figure for Minority interest = 116813 ?

Posted by kcchongnz > 2016-02-27 22:19 | Report Abuse

Posted by natelietan > Feb 26, 2016 11:20 AM | Report Abuse

hi kcchongnz

may i know where did you get the figure for Minority interest = 116813 ?


It is from the balance sheet equity section