Enterprise Valuation

We discussed some key equity metrics in our previous post. Multiples like PE, PB, etc. help you focus on the equity part of the capital structure while valuing a company. However, in order to get a true picture of the financial health of the company, an investor needs to focus on the Enterprise Multiples as well. Some of the key enterprise multiples are:

  • Revenue: A business has to finally sell something. The revenue number gives an idea about scale and is more or less independent of accounting treatment.
  • EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization): Give an approximate measure of a company’s operating cash flow. By ignoring capital investments and taxes, it allows investors to do apples-to-apples comparison between companies in the same industry.
  • OpFCF (Operating Free Cash Flow): It is a modified version of EBITDA that includes the effects of CapEx (Capital Expenditure) into the calculation. It is cash-based, forward looking and unaffected by accounting.

For readers who are interested in a thorough treatment of valuation metrics, a good primer from UBS is can be found here. Happy investing!

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