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| Name | Valuation Multiples Calculation: What Goes in the Numerator and Denominator |
| Video Uploader | Video From Mergers & Inquisitions / Breaking Into Wall Street |
| Upload Date | This Video Uploaded At 22-05-2018 17:38:45 |
| Video Discription | You’ll learn about how to calculate valuation multiples in this tutorial, and how to determine what goes in the denominator based on the numerator of the multiple. https://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" Table of Contents: 0:50 The Short Answer 5:42 Equity Investments, Capitalized Operating Leases, and Other Items 8:00 Recap and Summary Resources: https://youtube-breakingintowallstreet-com.s3.amazonaws.com/106-16-Valuation-Multiples-Calculation.pdf https://youtube-breakingintowallstreet-com.s3.amazonaws.com/106-16-Valuation-Multiples-Calculation.xlsx Lesson Outline: The numerator of a valuation multiple should almost always be Equity Value or Enterprise Value. The denominator could be almost anything – revenue, EBITDA, EBIT, Net Income, Free Cash Flow, NOPAT, etc. To decide how to pair them, ask whether the numerator *adds or subtracts* a specific Balance Sheet line item, such as Cash or Debt. If it does, then you should *exclude* income or expenses from that item in the denominator of the valuation multiple. This is why you use metrics such as EBITDA with Enterprise Value – you subtract Cash and add Debt to calculate Enterprise Value, so you must, therefore, exclude Interest Income and Interest Expense in the denominators of multiples based on Enterprise Value. If the numerator does *not* add or subtract a Balance Sheet line item, then you should include income or expenses from that item in the denominator. So, if Equity Value is the numerator, the denominator must be Net Income to Common – to reflect all the Income Statement revenue and expenses – or a metric that starts with Net Income to Common, such as Free Cash Flow. That’s because Equity Value does not add or subtract anything on the Balance Sheet – it’s just equal to Share Count * Share Price. If Enterprise Value is the numerator, then the denominator must exclude or be “before” Interest Income, Interest Expense, Other Income, Preferred Dividends, and other line items that correspond to specific Balance Sheet line items. You subtract Cash to move from Equity Value to Enterprise Value, so you must exclude Interest Income in the denominators of Enterprise Value-based multiples. You add Debt to move from Equity Value to Enterprise Value, so you must exclude Interest Expense in the denominators of Enterprise Value-based multiples. You subtract Equity Investments to move from Equity Value to Enterprise Value, so you must exclude Equity Investment Net Income in the denominators of Enterprise Value-based multiples. This is why metrics such as EBIT and EBITDA completely exclude it by starting at an earlier point on the Income Statement. This rule also works for capitalized operating leases – if you capitalize the operating leases and add them to Enterprise Value, you must exclude the lease rental expense in the denominator and use metrics such as EBITDAR instead. |
| Category | Education |
| Tags | valuation multiples | Enterprise Value | Equity Value | EBIT | Operating Income | EBITDA | Interest Expense | Interest Income | Equity Investments | Net Income | P / E | EV / EBIT | EV / EBITDA | EBITDAR | EV / EBITDAR | capitalized leases | numerator and denominator | mergers and inquisitions | breaking into wall street | denominator and numerator | ebitda multiple valuation | multiples valuation | working capital | equity research | mergers and acquisitions | ebitda multiple valuation example |
