The rationale for taking out investments in associates from EV is that EV captures "core operations", and associates do not capture that. What if a business has a significant investment in associates that is related to a company's core business (e.g. associates generate 40% of the company's revenue)? Do we still strip that out?
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Have seen example of for example mining companies that have this sort of stakes in mines, where indeed it is considered core.
Personally I would value them separately (mining vs owning a mine -> different beta etc) and add your stake of the equity value (you do not consolidate the debt of the associate either) to your EV.
Alternatively you could include the expected dividends to your FCF in a DCF, but it's a bit shaky especially from a WACC point of view.
Thanks so much for the answer my friend!
Can someone please help understamd the accounting of associates?
Question is: I understand that 1) when I buy "associate" for $100 - I record minus 100 Cash and plus 100 Investments in Associates on the asset side of balance sheet. 2) when associate reports $500 net income and I hold 10% - then plus 50 to my Investments in Associates on the asset side and plus 50 to Investment Revenue on liability side?? I've never seen such a line (Investment Revenue ) in company's equity...but it's the only way to balance assets and liabilities+equity. Is it correct? Thanks!!!
Correct. To balance the increase of Associates on the asset side you add it to your equity on liability+equity side. It flows through the income statement - net income from associates typically is shown as a line after tax and before net income (not to tax it twice) and thus flows into the equity
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