When calculating it with debt and common stock (and then subtracting cash and short term), does that mean all liabilities and equity? Or is it specifically just debt and common stock, and stuff like accounts payable would be excluded bc it’s not debt and retained earnings wwould be excluded bc it’s not on stock
debt is not the same as liabilities. Total debt = The total of interest-bearing short-term and long-term debt, excluding liabilities such as accrued expenses and accounts payable
Think about EV in terms of Market Values. It’s total Market Value of equity, debt, preferred, plus minority interest (if there is any) and then minus cash and cash equivalents.
It’s essentially how much you would have to pay to buy the company at market value.
Don’t we only LTD in Enterprive Value calculations?
You use short-term debt as well. The reason being that Enterprise Value, as stated before is essentially the total cost to take over the firm. Total cost to take over the firm includes the entire market cap, and all the debt you have to pay off. Whether the debt is short-term or long-term you still have to pay it off so it should be included in the EV calculation.
Side note: Make sure to also subtract cash/cash equivalents/marketable investments from EV as those accounts reduce your total cost for taking over the company
why is minority interest added ?
EV is heavily used in M&A valuation. When you own >50% of a sub, we’ll have to consolidate the sub on our B/S. As part of the process, we’ll end up subtracting the portion of NI that doesn’t belong to us (the parent). This is basic intercorporate accounting in L2, and I’m assuming you already know this.
When determining a takeover valuation, you’ll usually use mutliples like EV/EBITDA or EV/Sales. In the above step, when we consolidated the sub, we included 100% of the sub’s sales, however, not its entire income. So there’s a disconnect. In order to put your financial statements on an equal footing and ensure everything synchronizes, you add back minority interest. This way, now you correctly represent 100% of the sub’s sales and 100% of its NI.
Note that nothing’s stopping you from pursuing another option: instead of adding back minority interest, you can deduct the sub’s ownership from the remaining line items on your I/S (and B/S) individually. However, this exercise is lot more tedious than simply adding back minority interest to the final EV of the parent.
Stuff like accounts payable is ignored as it is part of working capital, smth which relates to mainstrem revenue-generating activities, rather than financing.
I guess minority interest (NCI) is added to account for the cost of 100% acquisition of all the subs down the group structure. Or to ensure consistency of ratios as Aether mentioned.
Without subs’ financial statements you cannot calculate the parent’s share of Revenues or EBITDA in the subs. The only items disclosed are P/L attributable to owners of the parent and non-controlling interest. As such EV/EBITDA or EV/Sales can be calculated only for the group as a whole (before deducting NCI from the P/L and after adding NCI to equity and debt)
I believe the last idea is the basic reasoning behind adding NCI.
EV already include Minority interest. Why would one add it again?