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
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.
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.
"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.
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 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.
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.
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.
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
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.
"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 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."
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.
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 ?
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.
New IPO: Carlo Rino Group Berhad, a leading fashion retailer of women’s handbags, footwear, and accessories, aims to list on the ACE Market!
MQ Trader 2031 views | 6 d ago
0:17
New IPO: A homegrown air fragrance company, Vanzo Holdings Berhad aims to list on the Ace Market!
MQ Trader 1705 views | 7 d ago
0:17
New IPO: Winstar Capital Berhad, a specialist in the extrusion of aluminium profiles and fabrication of aluminium ladders aims to list on the ACE Market!
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
Intelligent Investor
384 posts
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