Why You Never Project Enterprise Value

In this lesson, you’ll learn why you NEVER project Enterprise Value for future periods.... more.
By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers"
Continued... (e.g., if it’s the middle of the year right now, projecting Enterprise Value at the end of the year or the end of next year) when you’re valuing companies.

Table of Contents:

1:57 The Basic Reason Why This Makes No Sense

3:10 What Would It Take to Project Enterprise Value? Time Travel!

6:31 Exceptions and Special Cases

Question That Came In the Other Day:

"I don't understand how you calculate valuation multiples. When you look at historical figures for items like revenue or EBITDA, I get that you calculate Enterprise Value as of today's date, or whatever date you're valuing the company.

But what about future revenue and EBITDA figures? For example, if it's the middle of 2014 and we're looking at projected 2015 or 2016 figures, why do you still use Enterprise Value as of today's date in the calculations?"

Great question! Here’s the short answer:

You NEVER project Enterprise Value because the company's share price, and therefore its Equity Value and Enterprise Value, as of TODAY'S DATE, reflect BOTH historical financial performance AND FUTURE EXPECTATIONS!

So Vivendi's Enterprise Value here is EUR 23.0B - that reflects their most recent results, but ALSO what "the market" thinks the company will earn in future years, because the share price trades based on those future expectations.

What Would It Mean to "Project" Enterprise Value?

For example, what would you have to DO to project Vivendi's share price, cash, debt, and other items that go into Enterprise Value at some future date?

(Let's say the end of FY 2014 / beginning of FY 2015).

You'd have to invent a time machine, jump to that future date, and then see Vivendi's historical results over this year, plus see what the NEW expectations for the 2-3 years in the future after that date are like.

And you'd have to then change around all your projected revenue, EBITDA, etc. figures to reflect those new expectations!

There's absolutely no way of knowing what those "future" "future" expectations will be - it's hard enough to figure out what TODAY's expectations for the future are! - so you never project Enterprise Value like this.

Exceptions and Special Cases

One Exception: Sometimes you complete a "Future Share Price Analysis," where you do project the company's share price… and then discount it to its net present value based on the selected discount rate.

But the purpose of that analysis is much different - you take TODAY's multiples (the historical ones) and apply them to a FUTURE figure such as revenue, EBITDA, or EPS, and get to the implied share price like that, and then discount it back…

But it's just one way to estimate a company's value TODAY, you're still NOT trying to figure out exactly what the market will value it at 1, 2, or 3 years into the future.

Another Exception: If you're looking at older multiples, such as EV / Revenue or EV / EBITDA from 1 year ago, 2 years ago, etc. then you might go back and calculate the historical Enterprise Value at those points in time… just to see how the company's multiples have changed over time.

To avoid confusion with this, we recommend only using ONE historical period and ONE set of historical multiples in your analysis.

For example, don't look at the Last Twelve Months (LTM) between 7/1/2013 and 6/30/2014, and the calendar year ending 12/31/2013, and the calendar year ending 12/31/2012.

Just pick EITHER the LTM period or the 12/31/2013 calendar year period and use that.

Then, the forward multiples can all be standard and should all use TODAY's Enterprise Value (or the Enterprise Value as of the valuation date).

Resources
http://youtube-breakingintowallstreet-com.s3.amazonaws.com/106-09-Why-No-Enterprise-Value-Projections.xlsx

Видео Why You Never Project Enterprise Value канала Mergers & Inquisitions / Breaking Into Wall Street