05-01-2017, 05:45 PM
EV and EVBITA both start with market capitalization and modify it from there. It does not take into account whether the company's stock has been bid up to an unsustainable level because of speculation, M&A rumors etc. Neither does it address a company whose stock has been marked down due to short-term issues, in sympathy with another company in the same sector or just by being ignored by the market. Admittedly, the second instance is more advantageous than the former.
However, Enterprise Value has nothing to do with the earnings power of the company nor what is has done in the past. I know everyone says what was done in the past is irrelevant but I disagree. If a company repeatedly underperforms the profit margins (gross, net or operating) it was able to achieve 5 to 10 or more years ago, then perhaps the expectations of the price you pay today should be tempered with the changes the company or its market has undergone.
Ben Graham and Chuck Carnevale on SA have both discussed valuation based on a company's earnings ability. Chuck has done a little research into the past which he had talked about in an article several years ago. Roughly, according to Chuck IIRC, companies who are able to consistently grow earnings less than 15% annually have historically been valued at a P/E of around 15, 15-30% increases in earnings deserve a P/E close to its earnings growth rate and above 30% the PEG (P/E to Growth) ratio should be used. (Note: anyone is free to correct me here since I'm too lazy to rummage through thousands of Chuck's posts on SA.) Because of that, I prefer to use P/E along with several other metrics to value a company I am interested in.
EV may be a good indicator of valuing a takeover bid for a company or its attractiveness as a takeover or merger candidate. To me, it's not a good metric to determine its suitability as a long-term investment, especially dividend growth companies I am interested in.
However, Enterprise Value has nothing to do with the earnings power of the company nor what is has done in the past. I know everyone says what was done in the past is irrelevant but I disagree. If a company repeatedly underperforms the profit margins (gross, net or operating) it was able to achieve 5 to 10 or more years ago, then perhaps the expectations of the price you pay today should be tempered with the changes the company or its market has undergone.
Ben Graham and Chuck Carnevale on SA have both discussed valuation based on a company's earnings ability. Chuck has done a little research into the past which he had talked about in an article several years ago. Roughly, according to Chuck IIRC, companies who are able to consistently grow earnings less than 15% annually have historically been valued at a P/E of around 15, 15-30% increases in earnings deserve a P/E close to its earnings growth rate and above 30% the PEG (P/E to Growth) ratio should be used. (Note: anyone is free to correct me here since I'm too lazy to rummage through thousands of Chuck's posts on SA.) Because of that, I prefer to use P/E along with several other metrics to value a company I am interested in.
EV may be a good indicator of valuing a takeover bid for a company or its attractiveness as a takeover or merger candidate. To me, it's not a good metric to determine its suitability as a long-term investment, especially dividend growth companies I am interested in.
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“While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.” - earthtodan
“While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.” - earthtodan