Net Asset Based Valuation Formula – Year-over-year (YT) Compound Annual Growth Rate (CAGR) Monthly Growth Rate Average Annual Growth Rate (AAGR) Aggregate Revenue Per User (ARPU) Initial Compound Growth Rate (IGR) Continuous Growth Rate (SGR) Reinvestment Rate (LTM) Same- Store SalesOrganic GrowthInorganic Growth
Working Capital Negative Working Capital Conversion Cycle Operating Cycle Working Capital TurnoverOperating AssetsNetwork Operating AssetsOperating Working Capital (OWC)Average Collection PeriodAverage Inventory PeriodAverage Payment Period
Net Asset Based Valuation Formula
Activity Ratio Days Sales Outstanding (DSO) Inventory Accounts Receivable
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Return on Invested Capital (ROIC) Return on Assets (ROA) Return on Equity (ROE) DuPont Analysis Return on Capital Employed (ROCE) Equity Multiplier Return on Sales (ROS) Return on Net Assets (RONA) Operating Profit on Investment; (ROI)
Liquidity Ratio Current Ratio Quick Ratio Acid-Test Ratio Cash Flow Adequacy Ratio
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Net operating assets are the difference between operating assets and operating liabilities necessary for the company’s core activities.
Enterprise Value (ev)
A company’s net worth (NOA) is equal to the value of all assets directly related to core operations minus all operating liabilities.
As shown in the formula above, a company’s working capital represents the difference between its operating assets and operating liabilities.
If the asset is needed to continue the company’s operations, it can be considered a “current asset”.
And if a certain debt is necessary to maintain the company’s activities, then it will be described as “operating debt”.
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An example of an asset that would NOT qualify as an active asset would be marketable securities that would be classified as an investing activity.
Although short-term investments generate income for the company, they are considered “side income” and a non-core asset that is not related to its core business.
Also, an example of debt that would NOT qualify as operating debt would be long-term debt because debt is a financing activity.
The value of a company’s operating assets is equal to the sum of all operating assets minus the value of all non-operating assets.
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Similarly, the value of a company’s operating liabilities is equal to the sum of all operating liabilities minus the value of all non-performing liabilities.
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Of the $10 million in total assets, $4 million refers to financial assets such as marketable assets and short-term investments.
We can subtract non-performing assets from total assets to calculate the company’s total working assets of $6 million.
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If a company has $1 million in long-term debt, we can subtract that amount from its total debt.
Given the accounting equation (assets = liabilities + equity), total liabilities should be $3 million, given $10 million in assets and $7 million in equity.
When the $1 million in debt is subtracted from the $3 million in total debt, we are left with $2 million in operating liabilities.
Using those two values, we can subtract operating liabilities from operating assets to arrive at the value of operating assets, which comes to $4 million.
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Get instant access to video courses taught by experienced investors. Learn how to model financial statement, DCF, M&A, LBO, Comps and Excel shortcuts. You’ll learn how to calculate enterprise value starting with cost of equity for three different companies: Target, Vivendi, and Zendesk. You’ll learn how to deal with things like pensions, operating expenses, operating losses, convertible bonds, and more.
This tutorial will explain how to calculate enterprise value, but let’s start with the basics and define what enterprise value is.
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Enterprise value is the value of the company’s core business activities (ie net operating assets) but of ALL INVESTORS in the company (equity, debt, preferred and possibly others).
On the other hand, the value of equity (also known as market capitalization or “market equity”) is the value of ALL that the company owns (i.e. Fixed Assets), but only to the EQUITY INVESTORS (common shareholders).
For example, in DCF, Unlevered Free Cash Flow is combined with Business Value, and you first calculate the Business Value of the Company, then return to its Equity Value and the stated share price.
And in benchmarking a company, you use metrics and multiples based on enterprise value, such as the TEV/EBITDA multiple.
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Enterprise value is important because it is not affected by a company’s capital structure, but only by the performance of its core business.
To calculate business value, you subtract the “Non-Fair Assets” – in this case cash only – and add the “Liability and Equity” line, which represents the other groups of investors – in this case, debt and preferred stock.
They mistakenly say that you add debt because it “makes the company more expensive” or that you take out equity because it “makes the company cheaper to acquire.”
For example, if a company buys a new plant using its cash flow, this will affect PP&E (plant, property and equipment) and cash.
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PP&E is considered an operating asset, so it affects the value of the business, but cash is a fixed asset, so it does not affect the value of the business.
Changes because assets comparable to non-current assets do not affect the calculation of the cost of equity capital. Only the company’s assets matter.
When analyzing public companies, you typically first calculate the cost of equity for each company and then create a “bridge” to the cost of equity.
Ideally, you’ll use market values for these items, but if they don’t exist, the book assumes they’re positive for everything but equity value.
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If you find something that is not on this list that you want to add or remove, you should be very careful because there are
The company’s balance sheet is your starting point for this exercise, but you’ll need to look beyond it to find information about things like the fair market value of debt, plan pensions, and net operating losses included in a deferred tax asset.
Can be calculated from Business Value figures, but is rarely a good reason to deviate from the standard set.
Goodwill and other intangibles should never be included here, nor should DTAs (excluding NOLs) or DTLs; Industry-specific assets (eg “Content Assets” for media companies like Vivendi and Netflix) are operational assets, so they shouldn’t be here either.
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People add things like legal and regulatory liability, and you can drill down into something like the Terms to see what’s in there.
We cover these and some of the more advanced, specialized cases in the full courses on this site.
Welcome to our next lesson in this module on equity value, business value and multi-level pricing. In this lesson, we’ll look at the cost of equity to bridge business value and look at it for Target, Vivendi, and Zendesk. We won’t spend much time on Zendesk because it’s very similar to Target. Both are US based companies. Vivendi will be slightly different because it uses IFRS, so the accounting rules are slightly different than under US GAAP. But we’ll start at Target and go from there. I’m not going to do a slide show for this one because it’s something that you have to look at in Excel and see when you go through the company documents and highlight different things and figure out what any of them are. pull in. .
By now, you should already be familiar with the concept of bridging, as you saw it in the first few lessons of this module, where the cost of equity represents the value of the underlying assets to shareholders. So we always start by calculating the market value of equity. Diluted shares are multiplied by the share price. The value of the business then represents the assets that work for all investors. So we remove the non-performing or non-core assets and then add the debt and equity items that represent the different groups of investors in the company. And we looked at some common examples of what you add and subtract from this calculation. Now we’ll see it done in real life for these companies. As always, I have detailed information with each company’s example explaining why we add, remove, or omit certain items.
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So at a high level, typically when you do this exercise, you want to start with the balance sheet of the company. So for Target, we can pull their data. I’ll use excerpts for all of this, not fill in the details, because it’s very difficult to jump and scroll to different places when it’s a hundred pages. So I’ll look up the balance sheets. And it’s not actually listed as a topic anywhere, but if we dig a little bit, we can see it right here, consolidated statements of financial position. As a result
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