Investment in associates? (How to account for them?)
So I don't quite get this.
I always thought that investment in associates must be TAKEN OUT of EV. For instance if I own 40% stake in a 1MM company I take out 400k.
The rationale I was given was that in an EV/EBITDA multiple the numerator and the denominator both have to reflect that same thing. Since an associate is NOT our subsidiary, we do NOT consolidate its earnings - so the denominator does not reflect investment in associates. Hence the numerator (EV) should not either.
But then I stumbled across something called "the equity method" whereby if you buy 400k stake in an associate and your associate earns 100k in profit for the year - you add 40% (40k) of that profit to your P&L and you increase your investment account by 40k (ie it now is 440k).
So....wait my EBITDA would reflect my associate earnings? So why would I take our the associate stake from EV?
I have a suspicion that there may be more than one method to treat investment in associates and under equity method you don't subtract their value from EV. In this case what is (are) the name(s) of other method(s)?
Investment in associates? (How to account for them?) (Originally Posted: 03/09/2015)
So I don't quite get this.
I always thought that investment in associates must be TAKEN OUT of EV. For instance if I own 40% stake in a 1MM company I take out 400k.
The rationale I was given was that in an EV/EBITDA multiple the numerator and the denominator both have to reflect that same thing. Since an associate is NOT our subsidiary, we do NOT consolidate its earnings - so the denominator does not reflect investment in associates. Hence the numerator (EV) should not either.
But then I stumbled across something called "the equity method" whereby if you buy 400k stake in an associate and your associate earns 100k in profit for the year - you add 40% (40k) of that profit to your P&L and you increase your investment account by 40k (ie it now is 440k).
So....wait my EBITDA would reflect my associate earnings? So why would I take our the associate stake from EV?
I have a suspicion that there may be more than one method to treat investment in associates and under equity method you don't subtract their value from EV. In this case what is (are) the name(s) of other method(s)?
bump
In the end you just want an apples-to-apples comparison for your ev/ebitda multiple so if you want to include associates in ebitda then you include it in ev also and vice versa.
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