Calculating Enterprise Value

Key words: Core business operations, Operational items,
Long-term funding sources

Enterprise Value represents the value of the company’s Operating assets but
there are many confusions when thinking about what to include.

Take Shareholders Equity, add Debt and substract Non-operating assets.
But what is the point of adding and substracting different items?

The Enterprise Value calculation is always somewhat subjective. Nevertheless,
there are 3 rules to take into account when moving from Shareholders Equity to Enterprise Value:

1. Extra costs for an acquirer of the company
2. Long-term funding source
3. None operating assets

Balance Sheet may look like this:

Assets
Current Assets
Cash…..$100
Short-term investments…..$10
Receivables…..$50
Inventories…..$5
Non-current Assets
Property, Plant & Equipment…..$1 000
Equity and investments…..$500
Goodwill…..$200
Intangible assets…..$80
Total Assets: $1 945
Liabilities and Stockholders’ equity
Current Liabilities
Short-term debt…..$10
Accounts payable…..$20
Taxes payable…..$30
Non-Current Liabilities
Long-term debt…..$500
Deferred Tax Liabilities…..$100
Other long-term Liabilities…..$50
Total Liabilities: $710
Shareholders’ Equity
Common stock…..$800
Additional Paid-In Capital…..$100
Retained Earnings…..$100
Treasury stocks…..$135
Total Shareholders’ Equity: $1 135
Minor interest…..$100
Total Equity: $1 235
Total Liabilities and Equity: $1 945

Enterprise value calculation
1. Calculation of fully diluted shares outstanding must take into account Basic shares outstanding,
Shares from Convertible securities, Warrants, Rights, Options and other claims.
Let’s say, Diluted Equity Value is $1 000

2. Taking into account the balance sheet, it is time to define which item to add/substract to the Diluted Equity Value.

Current Assets
2.1 Less: -$100, Cash is a non-operating asset
2.2 Less: -$10, if Short-term investments are liquid
2.3 Plus: $50, Receivables are operating assets
2.4 Plus: $5, Inventories are operating assets
Non-current Assets
2.5 Plus: $1 000, Property, Plant & Equipment are operating assets
2.6 Less: -$500, Equity and investments, they are non-operating assets
2.7 Plus: $500, Goodwill reflects acquired companies and is an operating asset
2.8 Plus: $80, Intangible assets are operating assets in the same way as Goodwill
Current Liabilities
2.9 Plus: $10, Short-term debt is a funding source, and need to be repaid in an acquisition
2.10 Less: -$20, Accounts payable – not a long-term funding source
2.11 Less: -$30, Taxes payable – not a long-term funding source
Non-Current Liabilities
2.12 Plus: $500, Long-term debt as a a funding source
2.13 Less: -$100, Deferred Tax Liabilities – a temporary source
2.14 Plus: $50, Other long-term Liabilities – depends on what is inside. Should be investigated
Shareholders’ Equity
2.15 Shareholders’ Equity: Shouldn’t be included because Market Value (Capitalization) is already taken into account
2.16 Plus: $100, Minor interes – represents a long-term funding source

 

Finally, EV = $1 000 – $100 – $10 + $50 + $5 + $1 000 – $500 + $500 + $80 + $10 – $20 – $30 + $500 – $100 + $50 + $100 = $2 535

Here, the EV is twice as much as the Market Value. Definitely, I will buy such shares )


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