We saw in the previous videos Just look at market value May be a little misleading When you look at companies that have some financial leverage Or a company with good debts For example, suppose this piece is company assets And we think they have so much debt Here is shareholder equity Then we assume they have too much cash These excess cash have little effect on the actual operation of the company I painted it here This is excess cash Some cash is necessary People often cannot distinguish between necessary cash and excess cash And they only regard this as necessary cash But we must take corporate value Separate from the market value of shareholders' equity or the value of debt I write all of these So this piece is corporate value This is corporate value Here is debt The right piece is debt Here is shareholder equity I think it’s a bit technical You don’t have to worry about this If this confuses you When I write about enterprise here This is the value of the company itself Therefore it is an operating asset The result of deducting operating liabilities Literally If you go back to the above two examples, you want to buy a pizzeria How much does your pizzeria need to pay net This is the problem we are trying to explain here When we discuss corporate value We saw how you calculated in the past video But it won’t hurt if you look again This is actually an unintuitive A formula you rarely see So it doesn’t hurt to do it again The first thing to point out is How do you calculate the market value of equity? The book value of shareholders’ equity is easy to calculate You can check the balance sheet of a certain company They will write down a number They would say this was recorded by our company’s accountant Book value of shareholders' equity But for market value It is calculated from the price per share that the market is willing to pay Therefore, the market value of shareholders’ equity is equal to Price per share multiplied by number of shares This is the market value of shareholder equity And even from this picture You can see corporate value plus non-operating cash Or investment or liquidity investment No matter how you name it Enterprise value plus cash equals debt plus (total market value of equity) Let’s call it market value Because we want to know when we know the price per share We want to figure out what the market determines What is the corporate value of a company? What exactly is the market value of a company? It is equal to debt plus here we are not adding shareholder equity I write down the market value because the two are the same Market value refers to the market value of equity (Equation side) plus the market value So we understand the concept of market value We can find out the amount of debt on the company's balance sheet We can also find out the amount of cash So we can subtract the amount of cash from both sides of the equation In this way we get the enterprise value equal to the equity market value Plus debt minus cash amount We move the amount of cash to the right side of this equation For example, if I have a stock like this Assuming the price per share is $10 1 million shares in total The company's debt is $50 million Excess cash is $5 million So what is the value of the enterprise? Ok, you must first calculate its stock market value The company’s stock market value is $10 per share multiplied by 1 million shares The result is $10 million This is the market value of the stock You add the debt That is to add 50 million US dollars Remind again that I have said in the previous video This is very unintuitive when you calculate Business value plus debt Intuition tells us that if someone wants If you buy the company from various stakeholders and have no debt They will have to pay all these debts Must also be paid to these people Total market value of equity So the money they have to pay is equal to debt plus shareholders’ equity Then they got cash compensation This is the extra thing they bought Can get them back some of the money So you have to pay to shareholders Have to pay to creditors Then you can get cash compensation In this case, what is the value of the enterprise? Equal to 60 million minus 5 million that is 55 million US dollars Ah makes sense The above is just a review of the corporate value video But the problem is Now that you have calculated the corporate value How do you ensure that it is fair corporate value? When you look at the stock market value You will compare it to the revenue Price to revenue ratio You are looking for the price-to-earnings ratio per share This is the price per share divided by the earnings per share This ratio is equivalent to The market value of the stock divided by the company's actual net income You just need to add the numerator and denominator Multiply by the number of shares You can get the stock market value and actual net income This is earnings per share P/E is actually the price per share divided by the earnings per share This is an idea You can compare two companies This method is not applicable here anymore If the capital structure types of the two companies are different At this time, what do you compare with corporate value? Here we use market value to net income What should corporate value be compared with? I made such an argument in the last video If we look at a business Essentially we should look at the benefits Part of the income that flows out of the company We should look at this part of the income Income from this asset In the first video about the income statement I once assumed that we made such a balance sheet You have income Income can be 100 You also have the cost of goods sold Let's assume that the cost of goods sold is -50 And I tell you another convention A colleague suggested that I adopt this convention This is actually a traditional practice For many accountants and financial analysts They don't use minus sign And put the numbers in parentheses This means that a negative number is negative 50 So the total profit will be 50 Then I actually thought Do something interesting Assuming the cost of goods sold here It does not include depreciation and amortization If these words confuse you, watch those videos All depreciation and amortization actually At the corporate level Suppose there are some sales, management and administrative expenses But this does not include depreciation and amortization Suppose the cost here is 10 Suppose there is depreciation and amortization Use D&A to represent depreciation and amortization I have grouped them in the first few videos This leads to such a situation Many companies’ income statements Depreciation and amortization So you actually have to look at the cash flow statement To find out depreciation and amortization I plan to do this in a future video But we have actually separated it Sometimes depreciation and amortization may occur Assuming depreciation and amortization is (5) May be in thousands So you can get operating profit In this example, it’s 50 minus 15, which is 35.
Then there are other items under operating profit You still have interest, I will list it for you– There are also non-operating income, interest and other items Let me write The interest assumption is also 5,000 If interest is what we care about So you have pre-tax income I did not include non-operating income Because we assume that cash does not generate any revenue Therefore, the pre-tax income is 30 (unit: thousand) If this is what we want to calculate Things slowly become a little complicated Let’s discuss your income tax situation Suppose the tax rate is 1/3 Income tax is 10,000 This gives the benefit 30 minus 10 equals 20 So I think this part of the income statement Is it purely determined by this one? This part with interest Depends on liabilities And income tax essentially depends on liabilities Because the more interest The more tax deductible your interest So this whole following piece depends on Your capital structure So if you just want to know What does corporate value generate What it generates is operating profit So I recommend using a good ratio Although this ratio is not commonly used Actually it’s not that it’s non-traditional But you don't hear much I think you can use the ratio of corporate value to operating profit As a good metric This ratio is the inverse of the return on assets in many cases As I defined in the first video There are many definitions of return on assets But in essence, it’s an operating profit per dollar What is the corporate value created I think this ratio is a good standard The more consistent metrics we see so far are When you see people discussing corporate value Is the ratio of corporate value to EBITDA If you go to a certain company to do research and analysis work This will become a tool The tools a company wants you to use We now hope to discuss it rationally and reasonably The first question is Reasonably and reasonably discuss what is EBITDA? EBITDA refers to the deduction of interest, taxes, and depreciation Profit before amortization Now let's see what it will be here It is deduction of interest, taxes, depreciation And the profit after amortization So it precedes all these projects Actually let us compare with the one mentioned earlier You have EBITDA EBIT too EBIT refers to the profit before interest and income tax are deducted EBIT refers to profit After adding back income tax and interest You will get operating profit I have reviewed this in the past But the difference between operating profit and EBIT is EBIT may include some non-operating income And here I didn’t take non-business income into account But if the cash generates part of the income And this part of the income has nothing to do with business operations Then it should be included in EBIT It is not operating income But they are usually very close when discussing it For example, it is very close to non-financial This is EBIT If we want to get EBITDA You just need to add back the depreciation and amortization.
So EBITDA is here EBIT of 35,000 If you add depreciation and amortization, the result will be 40,000 So in this example, the EBITDA is 40,000 If the unit I use is thousands, it is 40,000 The question now is why people care about EBITDA so much? Why is EBITDA often used instead of operating profit? The key to the problem is depreciation and amortization We talked about this issue in the video about depreciation and amortization These are just expansion costs There was no cash outflow during this period Let’s look at this depreciation and amortization It may be that I bought something for 100 or 100,000 dollars ten years ago Annual depreciation 1/20 But the cash was already spent 20 years ago So this is the depreciation and amortization during this period It does not need to outflow cash In fact, there is no cash outflow In a future video we will discuss how to calculate What is the cash outflow over a period of time It is called a non-cash expense So when you calculate EBITDA, when you add income tax Add back interest Add back depreciation and amortization What you get is the most essential thing The original cash flow generated by the company Many people care about this indicator Because this represents An indicator of a company's ability to do things For example, paying interest, paying income tax or The company's own investment capabilities Or we look at it from another angle If you look at the ratio of EV to EBITDA You are talking about raw cash for every dollar Corporate value generated Suppose I don’t reinvest in the company Nor buy new equipment If it's just raw capital So how much did I pay to the company? Is there a general rule of thumb? We will talk more about this in the future I think I have spent more than the normal time limit For a very stable In other words, for companies that do not decline or grow, 5x EBITDA is considered a better indicator But more importantly Transaction prices of other companies in this industry So all these ratios It's better as a relative valuation indicator I will show you discounted cash flow analysis in the future Or free cash flow analysis Or a dividend discount model or something Then you can calculate the absolute value But when you look at goods in the public market When you are choosing what to buy You also decide not to buy other things When you choose something and prepare to sell It means you have chosen not to sell other things So relative value starts to become a bit important Anyway, I hope these are useful to you