Enterprise value
The company value is the value of a company expressed in monetary units . From the point of view of utility theory , the value of a company corresponds to the subjective benefit that investors can derive from it. From the point of view of investment theory, the company value is the certain amount of money which, for the valuation subject, is equivalent in a definable way to the uncertain future net returns from the company. A distinction must be made between the value of a company and its price . Both are only identical under strictly defined conditions. The process in which the company value is determined is known asCompany valuation .
Value of the company
The value of the company can be understood as the so-called enterprise value or firm value (aggregated value for all capital providers), regardless of all sources of capital, or as equity value (value for the capital providers) adjusted for all outside capital .
Enterprise Value and Firm Value
The market value of a company's assets is made up of the market value of the assets required for operations and the market value of the assets not required for operations. The market value of a company's entire assets is also known as firm value or entity value . All of the assets can be distributed to the company's owners and lenders at market value. The assets required for business operations include all assets that are required to generate surpluses in the company's performance area. This includes the property, plant and equipment shown in the balance sheet, intangible assets and operating current assets (receivables, inventories, operating cash).
In addition, many companies also have assets that are not required for their business operations. The non-operational assets are characterized by the fact that they could easily be liquidated without affecting the operational performance process. Non-operating assets such as cash, participations, financial assets (in fixed and current assets) or real estate (which are not required in the operating process) can be used as part of the financing of the purchase price in the event of a takeover. In the case of a takeover, the “Enterprise Value” indicates the amount that is required to purchase the assets required for the business.
The illustration makes it clear that the enterprise value can be calculated in two ways: By determining the theoretical value for the assets required for business operations or by adding the market prices for equity and debt capital and then subtracting the assets not required for business operations. The second variant is also used for listed companies, since market prices are also available for significant assets (stocks, bonds). The market price of the enterprise value clearly shows the market value of the "operationally interest-bearing capital". It is the natural reference value for operational results (e.g. EBIT , EBITDA , NOPAT ) in order to identify over- or undervaluation of the company on the stock exchange .
Equity value
The equity value ( equity = equity) is the value of the equity of a company. It can also be determined on the basis of a theoretical valuation or on the basis of market prices. When determining the value, the equity value corresponds to the aggregated value of all discounted future net cash flows from the valuation object minus the payments to the lender. When determining market values, the market prices of all components of equity are added.
Theoretical value of the enterprise value
The appraisal of the assets required for business operations is the subject of the main article company valuation . Therefore, here is just an overview of the common valuation methods.
Success-oriented processes (e.g. discounted cash flow model)
In the case of a success-oriented valuation model, the forecast successes (e.g. NOPAT, operational free cash flows) - on the left side of the balance sheet - are compared with the return demands (capital costs) of all investors - on the right side of the balance sheet. The return requirements are determined from current market prices for risk-free returns and risks on the capital market. The present value of all successes gives the theoretical value of the assets required for business operations.
Cost-oriented method (asset value)
The intrinsic value of a company results from the sum of the isolated assets of a company. In the following, the methods of determining the asset value are individual valuation methods. A distinction is made between the following forms:
• Reproduction value: The determination of reproduction values is based on the premise that all assets available in the company can be purchased as alternatives. The adequate valuations are replacement prices on the procurement market.
• Liquidation value: The liquidation values are determined on the premise that the company will be broken up. In contrast to the reproduction value, the determination of the substance values is not based on the prices on the procurement market, but on the sales market.
Market-oriented process
There is no comprehensive evaluation of all future successes or assets, but the company's market prices - on the right-hand side of the balance sheet - are compared with a sustainable indicator of the company's value - on the left-hand side of the balance sheet. With the help of relativizations, the evaluations of different companies can also be compared with one another. Market comparisons thus also provide indicators for success-oriented and cost-oriented evaluations.
- Evaluation of each capital unit earned: The enterprise value is compared to a sustainable success indicator for the operative business (e.g. sales, EBITDA, NOPAT, operative free cash flows). The corresponding ratios (e.g. EV / Sales or EV / EBITDA) enable a practical evaluation of the successes of different companies to be compared.
- Valuation per invested capital unit: The enterprise value is compared with the book value of the operative business ( invested capital , capital employed, business assets). The corresponding ratios (e.g. EV / Invested Capital) enable a practical comparison of the valuation of the substance of different companies.
Enterprise Value Market Prices
The purchase price to be financed for a company with partial refinancing through the non-operational assets results from the consideration of market prices as follows:
| Market value equity | |
| + | Market value of debt |
| - | Market value of the non-operational assets |
| = | Enterprise Value (EV) |
A detailed analysis results in the following calculation scheme for the market price of the Enterprise Value (EV):
| Market capitalization of the common stock | |
| + | Fair value of preferred shares |
| + | Market value of conversion rights (options, convertible bonds) |
| + | Market value of third party shares |
| + | Market value of interest-bearing liabilities |
| + | If applicable, the present value of the leasing obligations (if operating leases are adjusted) |
| - | If applicable, net pension obligations (if funding conversion is not carried out) |
| - | Value of excess cash |
| - | Market value of short-term and long-term financial assets |
| - | Market value of non-operational investments |
| - | Market value of non-operational real estate |
| - | Market value of non-operating intangible assets |
| = | Enterprise Value (EV) |
Simplifying calculation of the enterprise value with net financial liabilities (net debt)
To simplify matters, one often assumes that the non-operational assets consist exclusively of financial assets. In addition, preference shares and conversion rights are shown at the value of the ordinary shares for the sake of simplicity. The enterprise value can then also be determined as follows:
| Market capitalization of the diluted shares | |
| + | Market value of third party shares |
| + | Net financial debt or net debt |
| + | if applicable, the present value of the leasing obligations |
| - | if applicable, net pension obligations or unfunded plans |
| = | Enterprise Value (EV) |
The simplified calculation is always problematic if there are other valuable, non-operational assets (investments, real estate, etc.) in addition to the financial assets. The use of preference shares or conversion rights with the current value of the ordinary shares can also lead to inaccuracies. The calculated enterprise value is therefore regularly too high for numerous preference shares / conversion rights.
Goodwill as a target
Increasing the company's value is important for preventing hostile takeovers, for aligning investments (avoiding bad investments), as an indicator of creditworthiness, for orientation for institutional investors and as a benchmark for evaluating management performance. Furthermore, it can be shown that the company value depends on the probability of insolvency (the rating ), which acts like a "negative growth rate" in the continuation phase.
The company value is only a suitable measure of success or a suitable measure of performance if, in addition to the rating mentioned, the company's earnings risks are also recorded (e.g. using the discount rate (cost of capital)).
literature
- Malte Kaub, Marc Schaefer: Value-oriented corporate management: An introduction to the concept. University of Applied Sciences for Economics, on behalf of the Hans Böckler Foundation. Berlin 2002. (PDF)
- Peter Seppelfricke: Corporate Analysis - How to Predict the Future of a Company. Schäffer-Poeschel Verlag, Stuttgart 2019, ISBN 978-3-7910-4433-0 .
Individual evidence
- ↑ Peter Seppelfricke: company analyzes . Schäffer-Poeschel, 2019, ISBN 978-3-7910-4435-4 , pp. 68 ff . ( schaeffer-poeschel.de [accessed on February 3, 2020]).
- ^ Aswath Damodaran: Musings on Markets: A tangled web of values: Enterprise value, Firm Value and Market Cap. In: Musings on Markets. June 29, 2013, accessed February 3, 2020 .
- ↑ Werner Gleißner: Capital market-oriented company valuation: Findings from empirical capital market research and alternative valuation methods . In: Corporate Finance . No. 4/2014 , 2014, p. 158 .
- ↑ Werner Gleißner: Fundamentals of risk management: with well-founded information for better decisions . 3. Edition. Franz Vahlen, Munich 2017, ISBN 978-3-8006-4953-2 , pp. 47 .