Basically asking for clarification: Why do you subtract investments in associates when calculating EV?
My understanding is that you do so such that when you calculate EV/revenue or EV/EBITDA mutliples, the numerator and denominator would be comparable (0% contribution from associates).
But recently I've been told that investments in associates are subtracted because these investments are considered non-operating and non-core. Another reason I received was because these assets tend to be liquid and hence can be considered somewhat like cash equivalents. I don't agree with the latter opinion but let me know your thoughts?
Both sound like bunk to me. Earnings from associates are below the line, so you don't get credit for their value. Also, to do a true ev for and equity accounted associate you would need to take on the debt and equity less cash of the associate and effectively consolidate. If it is equity accounted for you are mixing apples with oranges.
Why does my first reason sound like bunk? I think it seems reasonable and I've seen it quoted in print - do you mind explaining? Also, your reason for removing investments in associates would be that earnings are below the line?
Sorry, meant both of the final two reasons. The first is accurate.
Usually earnings from associates are below the NI line, and in any case will be below the EBITDA line.
So you're saying the main reason we take out associates in our calculation of EV is to facilitate the calculation of the EV/EBITDA or EV/revenue etc. multiple?
I've had an interviewer told me what if i wanted to calculated EV by itself and ignore the purposes of calculating multiples, in that case how should I justify the subtraction of investments in associates?
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