I had an interviewer in MS, he asked me how to calculate enterprise value of a company that has no revenue, I had no clue how to answer it. Currently involved in few other processes, it would be greatly appreciated if someone could answer me this question for future interviews! Thank you in advance
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This is such a 2010/11 question. Find a metric unique and important to its industry, and value it off that.
The long equation for EV is as follows. EV = Market Cap (share price x number of common shares) + Preferred Stock + Debt + Minority Interest - Cash (and cash equivalents like short term securities).
As you can see from that equation, revenue is no where in that equation, revenue is used to calculate income statement. Likely this was a trick question from the interviewer. If he was serious, either he's drunk or he's looking for an answer like "standalone revenue does not directly impact EV calculations however a company with no revenue would likely be a very early stage growth company with little debt to no debt and only enough cash to fund operations/R&D. Therefore, the EV for that company would be very similar to its market cap." or some shit like that
And if it were to be private with no mkt cap due to the fact that they don’t have a share price?
Private companies still have market caps, just not a fluid trading stock price. That's why when you read press releases of companies who just raised a Series X, say "it implies a __mm valuation". That's because whatever investor or investing group made a commitment for y% of the company (private companies have share counts) for those ___mm dollars. It's simple arithmetic from there to back out what the implied total valuation is. As a company grows and becomes more "desirable" these shares become more desirable. The only difference in valuation is that instead of having a mark to market valuation at any point within an open trading day, your valuations happen at points of fundraising and your shares are remarketed at those newly set prices. Often times, this approach doesn't take into account RSUs, Options, and other SBCs which are very common place. Which is why at most banks, you are asked to hand spread a fully diluted Equity value which takes this stuff into account.
Answered above but yeah revenue shouldn’t affect ur EV here
I'm assuming the question was specifically about trading comps. Since you usually use a EV/EBITDA, EV/Revenue, or EV/EBIT multiple to value companies with trading comps. If the company has no revenue, then you use an industry specific multiple for example EV/subscribers or EV/oil reserves. Like others noted, revenue is not actually in the EV calculation.
Got it, thank you!!! appreciate it
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