How to Value a Stock Using Enterprise Value Multiples

Enterprise Value Multiples

When it comes to valuing a stock, there are a few different methods that can be used. One popular method is to use enterprise value multiples. This involves taking into account the company's total enterprise value and then dividing it by various metrics, such as revenue, earnings before interest and taxes (EBIT), or free cash flow. In this blog post, we will walk you through how to value a stock using enterprise value multiples. Let's get started!

What is enterprise value (EV)?

Enterprise value is the enterprise's total market value. It can be calculated by taking the company's enterprise value plus its net debt (cash, short-term investments, long-term investments, and other liquid assets minus total debt). As a result, the enterprise value of a company is usually higher than its equity market capitalization (market cap), as it takes into account the company's debt.

What are enterprise value multiples?

Enterprise value multiples are used to compare one company against another by looking at its enterprise value relative to specific metrics, such as revenue, EBIT, and free cash flow. These multiples can be used to estimate the value of a company relative to other companies in the same industry.

For example, suppose a whole bunch of companies in the same industry had enterprise value multiples of 3x revenue and a company had a multiple of 1.5x. In that case, this tells you that company ABC may be undervalued, and it is a good investment opportunity to explore further.

How to calculate enterprise value multiples?

To calculate enterprise value multiples, you first need to calculate a company's enterprise value. To do this, take the company's market cap and add its net debt (cash, short-term investments, long-term investments, and other liquid assets minus total debt). Once you have the enterprise value, divide it by a specific metric (such as revenue, EBIT, or free cash flow). This will give you the enterprise value multiple.

For example, on December 9th, 2022, Apple's market cap was $2.261 trillion, its cash and equivalents $23.646 billion, and its total debt $120.069 billion.

Apple enterprise value
Data from Wisesheets

Enterprise value = $2.26100 trillion + $23.64600 billion + $120.06900 billion

Enterprise value = $2.404715 trillion

Therefore the enterprise value of the company is $2.404715 trillion.

From the financial statements, we can see that the free cash flow, revenue, and EBITDA were $111.443 billion, $394.328 billion, and $133.138 billion, respectively.

Apple key financials

Therefore by dividing the EV by these metrics, we get the following enterprise multiples for Apple.

Enterprise value multiple for free cash flow = $2.404715 trillion/$111.443 billion = 21.57

Enterprise value multiple for revenue = $2.404715 trillion/$394.328 billion = 6.09

Enterprise value multiple for EBITDA =$2.404715 trillion/$133.138 billion = 18.06

You can use these multiples to compare across similar companies like Microsoft, Google, and Samsung.

Automatic enterprise value multiples

As you can see, calculating the enterprise value multiples for every company you analyze is very valuable and very time-consuming. Luckily using a tool like Wisesheets, you can get these multiples automatically for any stock you'd like.

The best way is to use the =WISE() function in this way:

=WISE("ticker", "parameter", "period/s")

You can see the whole list of parameters here, but here are the available enterprise value parameters:

  • Enterprise value
  • Ev To Sales
  • Enterprise Value Over EBITDA
  • Ev To Free Cash Flow

As for the periods, you can enter a specific ear like 2020, LY (latest fiscal year), TTM ("trailing twelve months), and LQ (latest fiscal quarter).

For example, here is how to get the EV to sales ratio for Apple in 2022:

Apple EV to sales Excel

Better yet, you can perform these calculations for many companies at once like this:

EV multiples Excel

Why use EV multiples to value a stock?

Enterprise value multiples provide a quick way to compare the enterprise values of different companies in the same industry. Use them when you want to quickly identify stocks that may be undervalued or overvalued relative to their competitors. Additionally, you can use EV multiples as a starting point for deeper valuation analysis.

What are some key factors to consider when using EV multiples to value a stock?

When using enterprise value multiples to value a stock, it is important to consider the following factors:

  • The quality of the company's financial statements
  • The industry average enterprise multiples for comparable companies.
  • The company's historical enterprise multiples.
  • Whether the enterprise multiple is high or low compared to the industry average.
  • Any one-time or non-recurring items that may have an impact on enterprise value multiples.

Conclusion

Enterprise value multiples are a valuable tool for investors who want to quickly compare different companies in the same industry and identify potential investment opportunities. When using EV multiples to value a stock, it is important to consider the quality of a company's financial statements, industry EV multiples, and any one-time or non-recurring items that may impact the multiples. Using these multiples can provide investors with valuable insights into the potential investment opportunities they should explore. However, you should use enterprise value multiples as a starting point for deeper valuation analysis.

Happy investing!

Guillermo Valles

Guillermo Valles

Hello! I'm a finance enthusiast who fell in love with the world of finance at 15, devouring Warren Buffet's books and streaming Berkshire Hathaway meetings like a true fan.

I started my career in the industry at one of Canada's largest REITs, where I honed my skills analyzing deals and learning the ropes.

My passion led me to the stock market, but I quickly found myself spending more time gathering data than analyzing companies. That's when my team and I created Wisesheets, a tool designed to automate the stock data gathering process, with the ultimate goal of helping anyone quickly find good investment opportunities.

Today, I juggle improving Wisesheets and tending to my stock portfolio, which I like to think of as a garden of assets and dividends. My journey from a finance-loving teenager to a tech entrepreneur has been a thrilling ride, full of surprises and lessons.

I'm excited for what's next and look forward to sharing my passion for finance and investing with others!

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