Lesson 8 of 9 · All lessons in this module
- Intrinsic value, mispricing and the three model familiesVideo lesson
- Dividends, splits, buybacks and the payment timelineVideo lesson
- Present value models: DDM and FCFEVideo lesson
- Preferred stock and the Gordon growth modelVideo lesson
- Multistage dividend discount modelsVideo lesson
- Price multiples and the method of comparablesVideo lesson
- Integrated cases: why multiples differ, the justified P/E and comparables
- Enterprise value multiples, asset-based valuation and choosing a modelVideo lesson
- Integrated cases: growth from dividend history, enterprise value and reconciling models
Lesson 8 of 9 · 15 min
Enterprise value multiples, asset-based valuation and choosing a model
Enterprise value prices the whole business net of its cash, so EV multiples compare companies with different capital structures; asset-based models value a company as what it owns minus what it owes; and combining models guards against the weaknesses of each.
In short
- Enterprise value = market cap + preferred stock + market value of debt − cash and short-term investments. It approximates the cost of a takeover.
- EV/EBITDA is the most common EV multiple; EBITDA is usually positive even when net income is not. Operating income can replace EBITDA.
- Equity value from an EV multiple: EV − debt − preferred + cash.
- Asset-based value = market value of assets − liabilities − preferred. It works for companies with few intangibles and many current assets; it gives a floor when intangibles matter.
- Each model family has strengths and weaknesses, so analysts often use several and investigate where they disagree.
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