2. Valuing Companies Flashcards
How do we evaluate a business ?
We use ratios
What are the most popular ratios ?
P/E Ration & EV/EBITDA Ratio
What is the Price-Earning Ratio (P/E)
Stock Price / Earning per Shares
EV/EBITDA Ratio
Entrerprise Value to EBITDA Ration
EBITDA
Earnings before taxes, depreciation and amortization
Earning per Shares (EPS)
Net Income (Earnings) / Share number
How do you compare the P/E ratio
- Select publicly traded Arcadis Peer
- Calculate P/E
- Average the peer’s P/E ratio
4.Multiply by Arcadis’ EPS (Estimate Arcadis’ value per share)
What is the enterprise value?
The value of operating assets, irrespective of financing
Enterprise value (EV) measures a company’s total value, often used as a more comprehensive alternative to market capitalization. EV includes in its calculation not only the market capitalization of a company but also short-term and long-term debt and any cash or cash equivalents on the company’s balance sheet.
Market Capitalization
Stock Price * Number of Shares
Entreprise Value Formula
Market Capitalization + Net Debt (= Debt - Cash)
What does the P/E Ratio tells you ?
- Constructed from Net Income
- Takes the point of view of equity holders
- Can be heavily affected by (Leverage and financing policies, Depreciation Policies, other exceptional itemps affecting net income)
What does EV/EBTIDA tells you?
Operational Profitability
What if the firm to be valued has negative earnings or EBITDA ?
You cannot use the P/E or EV/EBITDA method
Should we use the more recent earnings of EBITDA or 1-year forecast ?
Often use both
How do we forecast Free Cash Flows ?
- Set an explicit forecast period
- Build financial statement projections for the forecast period
- Estimate Free Cash flows for each year of the forecast period
