Detailed EV adjustments
Hi all, just a technical qns on the adjustments on EV. The simplified version for EV calculations of is EV = debt + equity - cash + operating and capital leases
A) For cash, do we deduct "restricted cash" from EV? And why? If it depends, under what circumstances do we remove it?
I personally don't deduct restricted cash from EV as this is operational cash. What we want to deduct is excess cash. Are there other reasons?
B) I chanced upon a spreadsheet by a senior, he has deducted "unconsolidated investments" from his EV as well. This "unconsolidated investments" includes 1. financial assets carried at costs; 2. investments accounted using equity method; 3. debt investments with no active market; 4 derivative financial assets for hedging; 5. Asset for sale financial (Only for current asset NOT for non-current asset)
I don't get the rationale of making such adjustments. So would appreciate if anyone can shed some light? Feel free to agree or disagree on his adjustments. Given that every financial statement, do share what is the thought process when you guys make such adjustments
C) Is there any adjustments that I should be including? (be it significant or not --- Just want to be thorough) and as well as the rationale of such adjustments
Lastly, and most importantly,
Given that EV is usually used in multiples such as EV / EBITDA, and that we are adjusting the EV component, how does the above changes affect our adjustments to EBITDA as well.
Thank you for helping!
A) For restricted cash, he might have deducted it for various reasons, depending on the purpose of the restricted cash balance.
B) You deduct items from Mkt Cap that are non operational, and are not part of your free cash flow calculation - reason being that they still have value despite the fact that they are not incl. in the operations (think yahoo and alibaba). Many of the financial items you mention are not part of free cash flows and hence needs to be deducted to reach EV. Normally we just assume that cash is the only financial item, but in reality there can be many more: you need to account for them all.
C) Think about financial versus operation items, and core versus non-core items.
D) The changes that you have mentioned does not affect EBITDA, nor should they. EBITDA does not incl. non-core or financial items, and hence you need make sure they are not incl. in EV for 100% consistency. Same reason you use P/E and not P/EBITDA.
Hi, thanks for your help. Would you mind sharing the following?
A) What are some of the purpose of restricted cash balance you have seen such that deduct or dont deduct from EV?
B) Just to make sure I get it, one should remove items that are non-operational (i.e. financial items) off the EV, right? For example, if I am acquiring a company A with equity investments in company B, I would need to remove "equity investments in company B"? My confusion lies in, given that EV is the value of the firm, hence the value we are paying, why should we remove non-operational item?
A) Special funding accounts for projects, JVs, debt obligations. Restricted cash is earmarked for a specific purpose and not immediately "deployable"
B) It depends what you are using the EV for. If you are using it for EV/EBITDA, the abovementioned items are not operational and hence unlikely to be used in your calculation of EBITDA. If one is being super precise and where breakdowns are available, you should use attributable EBITDA (as opposed to consolidated) IF you can break out the minority interest. With the absence of context, I caveat my reply
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