Comparable Companies Analysis
When calculating the Enterprise Value for a Comparable Companies Analysis do you use information from the 10k or 10q. Specifically, total debt, preferred stock, cash and cash equivalents, because the numbers are different on both filings.
Thank you in advance
Either depending what you need but ensure youre comparing the same between them.
Usually you use the more recent one as you calculate the multiples on a LTM basis.
Thank you for the reply, I really appreciate it. So just to clarify, Enterprise value = equity value + Total Debt + Preferred Stock + Noncontrolling Interest - Cash and Cash Equivalents, and it is best to use LTM when adding this up, right?
Thanks again.
http://www.investinganswers.com/dictionary/enterprise-value
10k
... or 10q
as long as you're consistent
EV comps better than Equity comps? (Originally Posted: 01/14/2008)
Q: why would you prefer EV comps to equity comps?
A: EV comps adjust for the leverage effect of debt, this would likely give us a better "apples-apples" comparison than using equity.
?
Companies with higher leverage would generally be expected by investors to provide relatively higher returns on equity (in exchange for the incremental risk); as such, equity comps denote the value of a company's equity on a risk-adjusted basis.
However, if you're trying to determine the value of an entire enterprise (equity + debt), EV comps enable an investor to value a company separate from its capital structure (this is of particular importance for an LBO, since PE funds will generally overhaul a target company's balance sheet once a deal has closed).
Here is my thought process, I want to know if I am on the wrong track:
If a company is leveraged, then its earnings is going to be risky (in addition to its operational risk) and therefore it is going to have a lower valuation (higher discount rate implies lower valuation multiple).
So suppose we are comparing equity trading comps of two companies, company A and company B and we want to see if one is undervalued/overvalued compared to the other. Assume they both have the same amount of earnings and that A has a lower P/E than B. Now this could be because of higher operational risk or because of leverage (i.e., financial risk). We cannot determine which is which by just looking at P/E. But if we look at EV/EBITDA we will get an apples to apples comparison.
Either way, I'd like to know when to use EV multiples and when to use equity multiples...
You are on the wrong track, but not by much. Valuation at the enterprise level (as opposed to valuation of any one security) will nullify differences in the capital structures of each business (thus, the financial leverage of either company is irrelevant). However, if one of the companies is inherently less risky (e.g., lower operating leverage), then the enterprise as a whole may be ascribed a greater value.
Long story short - EV multiples help determine the overall value of an enterprise, while equity multiples help you determine the value of equity (investors could also value a company's debt securities with similar multiples). The relevant multiple should be determined by what it is that you are trying to value.
I see. Suppose I am trying to value equity. Which do I use?
There are different approaches, but generally speaking, you'd want to use a metric that values the equity based off of earnings and / or cash flow to the equity (e.g., P/E, not EV/EBITDA).
RIM comps-how to adjust multiples? (Originally Posted: 03/23/2011)
Hi guys, recent had this question coming from the judges of our schools IB case competition.
When valuing RIM,I would say GOOG ,AAPL are its closest comparables , but both of the 2 companies have only part of their revenues generated from smartphone and tablets. So, how should i adjust any multiples?ie P/E, EV/EBITDA, EV/Sales? b/c given the current multiples rim appeared to be 50% undervalued, and judges disagreed about that.
Thanks in advance!
you are going to want more comparables than two but that wasnt the question. dig through the 10-k of the companies and try and pull out the smart phone segments and then run the analysis off of those numbers
The top players in smartphones are NOK, AAPL, RIMM, Samsung, HTC and Motorola (MMI). Not sure if Google is a great comp quite honestly since they provide an OS (Android) for smartphones and tablets.
As for valuation, sum of the parts analysis might be a pain. I suggest you stick with the basic forward mutliples based on concensus estimates for P/E, EV/EBITDA, EV/Sales. The other thing you have to think about is, does RIMM deserve a mutliple inline with peers? I would argue they don't given their lagging growth profile compared to the market. Say peers are trading at 15x CY11 EPS, while RIMM is trading at 8x. You could argue RIMM deserves to trade at a discount to peers but is still undervalued at current levels.
Hope that helps.
You need a better and broader comp set (as previous poster said).
then once you have a broader set of comps, you're still going to have variance between multiples. you need to think about how the businesses differ and how that could cause the multiples to differ. a better, faster growing biz is going to fairly trade at a higher multiple. Apple's growth is blowing the doors off of RIM so you can't just look at Apple's multiple and say if RIM trades for less that it's undervalued.
RIM might deserve a lower multiple than its peers. Your job is to look at the cash RIM generates, how fast that cash is going to grow, and how risky that cash flow is, and then you figure out how much lower the multiple should be. If it deserves to be 3x lower than peers and it's trading 5x lower, then you could say it's undervalued.
You can use Nok as it is in the same boat as RIMM, try CSCO, and MMI. You cant compare RIMM to Apple's smartphone segment, never not in ages. Also Google does not manufacture Smartphones, hence you cant compare with RIM as 80% of RIM's revenues are from devices.
I hope this helps.
Not sure how complicated you want to make this, but the Enterprise Server business is going to deserve a much better multiple than the Hardware segment.
.
It's easy man!
RIM value should be ZERO! hahaha...
GOOG isn't really a great comparable for RIM, I'd go with some of the companies ShawnDU2009 suggested. Often times in notes to the 10-K there will be a breakdown by sector, look for this.
RIM is going down the shitter. Why bother valuing it?
But I'll echo what was posted above. Look at Samsung, HTC, & MMI.
A comparable analysis for a division of the company? (Originally Posted: 09/22/2016)
I am working on putting together a comp. set for a lower-middle market private company. However, given the niche market of the client, putting together a comp. set is a challenge.
I did find divisions of public companies, that relate. However, I am not sure how to value that portion. To be specific, the income generation and associated cost related to the that division are broken-out within the financial statements, but the other components for the enterprise value are not (debt) and non-controlling interest. My concern is by using the EBITDA and EBIT for just the division with total capital structure, that it will not be a true representation.
Will it be better just to use the entire company instead of just the division? Although, the division is a direct match of our client and generates ~40% of the public company's total revenue.
Any guidance?
Thanks.
think about it for a second -
public company metrics: EV: 100 EBITDA: 10 EBITDA multiple: 10x
Division of Public Company: EV: what would you use here? 100? EBITDA: 4 EBITDA Multiple: 25x? ...hell no
The way I interpreted it they want to know if they should attempt to attribute a specific amount of debt to a division out of different types of debt for the parent or just use a multiple of net debt.
OP, I would stick to using percentages because you are making this way more complicated than it needs to be.
You wouldn't need to figure out the sources of debt unless you need a debt amortization schedule for an lbo or something. Depending on the company and if they do a lot of off balance sheet financing maybe it could be useful to figure this out then.
You can adjust the multiples to reflect the characteristics of comparable private/public company operating statistics.
Say you are trying to value Company A.
Once you've found your public comps (call them companies B, C, D, and E), choose one (realistically, you should do several) metrics you want to use. Let's say TEV / EBITDA. Then you find the median, mean, mean without outliers, or whatever other measure of central tendency you want of companies B, C, D, and E.
Maybe the median of your TEV / EBITDA for the public comps was equal to 9.3x. You then want to apply this multiple to company A. If Company A has EBITDA of $40MM, your TEV of company A = $40MM * 9.3 = $372.0MM
Interview Questions - Comparable analysis (Originally Posted: 09/25/2009)
Some help with these interview questions?
How would you perform a comparables analysis? What ratios/metrics would you use and why?
Draw a graph of how capital structure changes as a company goes from 100% equity to 100% debt and explain.
What is the formula for FCFE? When would you use a DCF using FCFE rather than FCFF?
Given net income, how would you find cash earnings per share?
Given net income, how would you find operating cash flow?
Why is EBITDA used?
When would you use EV/EBITDA and when would you use EV/EBIT?
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