My name's Phil Sparks and I'm an instructor at Financial Edge. Been here for about three years or so, and I specialize in finance.

My background is as an accountant and a group financial controller.

And I spend a lot of time with bits sort of the basics of finance, basics of debits and credits, and also valuations of businesses capital structures for businesses and a lot of excel, as you would imagine.

You can also see what we're looking to get through today.

We're focusing on trading comps and particularly on some of the nuances of trading comps, things that make the trading comps perhaps not work, and what we can do to fix them.

What we can do to make trading comps, multiples a little more accurate, and to take out some of the things, some of the variations, some of the unusual aspects that tend to skew the results, one way or the other.

Okay. Yeah. What you can see here are just all of the things that can have an impact on trading, comps on trading multiples.

What we're normally talking about with trading comps is we're talking about some sort of ratio between the valuation of a business and some sort of value driver.

Most common ones market capitalization to earnings. So PE ratios and also ev enterprise value to either EBIT or EV to ebit, EV to EBITDA is probably the most common one that we tend to see in real life.

So what we're gonna do is we're going to do a little bit of theory.

I've got some notes. I've got some slides, and then we're jumping.

We'll jump into Excel and we'll do a little bit of some exercises, to demonstrate some of the things that can go wrong, and also what you can do to fix them.

You should be able to see two spreadsheets, um, and empty version, and a full version.

I'm gonna open up the empty version and we'll do some of the exercises, some of the workouts within the empty version.

But, if you want to, to grab the solution file as well, then you'll, you, you don't have to kind of create the full version.

It's already there for you.

So do grab a copy of that while we're there. It's in the chat box. Okay.

I'm going to rearrange my screen a little bit and open up some of the information.

Let me just do that.

Of course, zoom is always a little bit inflexible, so I'm gonna shut that one down.

Okay. And let me move my screen around a little bit. There we are. Okay.

And I'm gonna go to Felix Times a little bit sluggish.

There we are within sometimes a little bit sluggish within Zoom, and of course, zoom.

Whenever I open up Zoom, it decides to rearrange my screen.

So just let me rear rearrange it.

So I've got the chat box and the participant list on my secondary screen.

Okay, there we're, okay, so what we're gonna do is, I'm just gonna jump into Felix, and Felix is our learning management system.

Great, great resource. Lots and lots of stuff. Over on the left hand side. We have loads of online learning on Felix lots of bite-sized videos and example documentation and so on.

Pretty much everything that we teach is covered in little Felix videos.

On the right hand side. We've basically got an analyze side, which gives us lots and lots of information on example companies.

So just to set the scene, I'm gonna open up the Felix page on Coca-Cola.

I'm gonna go to the valuation, and the valuation tab has basically got up-to-date information on Coca-Cola.

Now, we often use American companies, even if you're not based in the US, even if you're based somewhere else in the world.

In an IFRS environment, we often use American companies, simply because there are so many American companies, and particularly because there are lots of companies because the market is so large doing similar sort of things.

So it's fairly easy in American markets to find relatively similar companies, which enable us to do those trading comps valuations.

You can do the same thing in Europe.

You can do the same thing in Asia, but you've got a, a sort of smaller environment.

And there are sort of differences in the different territories that they operate that make trading comp valuations not always quite as robust.

So we're gonna jump into Coca-Cola.

Here's Coca-Cola's page of information, the valuation page.

And you can see on the left hand side you've got current share prices and the share prices doing pretty well at the moment, it's at $71. When I looked earlier in of the year, it was sort of high $50.

So they've obviously released a couple of sets of results that have been fairly good, and there's a lot of confidence about Coca-Cola in the US market.

We've got a standard EV to equity bridge in the middle, and this is absolutely key to understanding how valuations and particularly trading comp valuations work.

So at the top we've got the market capitalization. We're taking the share price and multiplying by the number of shares the diluted number of shares.

And that gives us a market capitalization for Coca-Cola in the US market of 309 billion US dollars.

That's what the total of all of the shares trading in the market are currently worth.

And then we have a standard EV to equity bridge.

Now, I sort of I sort of can't really think about this without envisaging that sort of picture that I'm sure lots of, you're familiar with the enterprise value on the left hand side plus cash.

On the right hand side you've got net, that you've got debt, and then you've got the equity value or market capitalization, and you're basically, what the enterprise value does is it, it shows you the value of the business regardless of how it's financed, regardless of the mix of debt and equity.

It's the value of the underlying trading part of the business.

So this is, the enterprise value here is 316 billion US dollars, and it's what Coca-Cola is worth for the bit that makes and sells and brands and markets, the soft drinks, and the mix of debt and equity could change over time.

That that element there, that 316 should remain relativelystable.

And also in getting to the enterprise value, we're taking out any of those other sort of fringe areas, non-core assets businesses that have been, that are in the process of being disposed of those sort of things. What we want is something that is representative of the value of the fizzy drinks section, the soft drink section of Coca-Cola going forward.

So that's a standard EV to equity bridge.

Now, the great thing about this page is as soon as you open it, it gives you the comparable businesses, the peer companies businesses that are operating in the same space, the same markets as Coca-Cola.

And you can see at the top of this list, you can see Coca-Cola and their EV to EBITDA ratio or multiple is 20.4 times.

So the enterprise value, the value of the underlying trading parts of Coca-Cola is, well, that's 20 times its current profitability.

And that ratio is what we would use to apply to another company in the same space, another soft drinks company, if we were looking to value it on the same basis as Coca-Cola.

And you can see that there are all of the kind of usual suspects. So we've got Pepsi Cola right next, similarly very large international business, making lots of soft drinks.

And you can see that their EV to EBITDA ratio is, or multiple is 15 times not quite as strong as Coca-Cola. Perhaps the brand isn't quite so strong, the profit margins are not so good.

But, you know, then it's not totally dissimilar.

It's, you know, you know, sort of mid to high teens to 20 times, you know, the, the numbers are not totally dissimilar.

Interestingly, if you look down to monster is a, has actually got a higher ratio, higher multiple.

And the reason for that, even though it's a significantly smaller business, is that it's growing much more quickly.

If you look over on this right hand side, you've got a column for compound average annual growth rates looking forward.

And you can see that for Coca-Cola and Pepsi, they're mature businesses.

So they're predicted to grow at around 4% per annum, which is not that far away from GDP growth.

Whereas Monster, smaller company, niche company operating in that energy drinks sector is growing much faster at nearly 8% per annum.

And that's really why the multiple is quite a lot stronger.

The multiple is 21.3 times, even though it's a smaller business, and that's slightly less.

And therefore it doesn't have the economies of scale and the size of Coca-Cola.

So what that basically tells you is the multiples should be reasonably consistent within one sector, and the multiples give you the basis on which to value another business.

But you'd need as far as possible to find a business that is as close as possible to your target company.

So for instance, if we were trying to value Red Bull, we would probably take monsters ratios, multiple monsters, multiple at 21.3 because they're also in that energy drink sector.

So that, you know, the expectation will be of future growth perhaps growth that will outstrip the big players like Coca-Cola, and Pepsi.

And therefore you could justify taking higher multiple, to value Red Bull.

Okay, so that's where we're going with this.

Just one little bit at the bottom, which is also really very, very useful.

In this bottom table here, we've basically got analysts consensus forecasts for Coca-Cola.

So we've got the real results to the end of December, 2023, the last 12 months, figure LTM, until June, 2024.

So that'll be including the two quarters from this year.

And adding those on to the last two quarters for 2023.

And that gives us June, LTM as you can see, if I look at the profitability at EBITDA, EBITDA is growing, you know, growing relatively modestly, but it is growing slightly.

And if we look forward to 2024, 25 and 26, you can see that the EBITDA for this business, for this business is predicted to grow.

If we did an EV to EBITDA for each year, the ev the enterprise value, the value of Coca-Cola would stay the same, but the EV to EBITDA would multiple, would gradually fall.

And that's really just a function of the maths of it. Basically, we are taking the same number on the top, and we're dividing by a number that gradually grows as the predicted profitability increases, and therefore, as a result, the multiple would fall slightly.

And that's what you'd expect. And it's actually a good check when you've done your calculations.

If you've done some multiples to make sure your multiples are sensible, you would normally, for most businesses, expect those EV to ebit or EV to EBIT multiples to gradually fall as their profitability increased.

Okay, so we're gonna jump back to our, to, to some slides.

I'm gonna open this up. Just give me a moment.

Oh, not PowerPoints, I've clicked, sorry, I clicked on the wrong icon.

Let's go to PDF annotator. There we are.

And we're just gonna look through a handful of slides just for 10 minutes or so, and then we're gonna jump into Excel and do some exercises to flesh this out, to understand this a little bit better.

So, first thing we're going to do is we're gonna look at, there are you, there are basically four slides, four circumstances that can make these multiples look a little bit odd.

And what we are talking about most of the time here is going and looking for the value of a business, finding out its EV and finding out its EBIT or EBITDA, and creating a multiple.

Now, we've seen that you can do that for Pepsi Cola, you can see that you can do that for Coca-Cola, where does this go wrong? Where do you get unusual or unrepresentative or misleading multiples? And we've got basically four circumstances here, four areas which can give rise to unusual numbers.

So first thing is, if a business buys another company in the middle of the year, then that can give a very unusual multiple, it can give a misleading multiple.

So we need to kind of go back to the basics of accounting here, a little bit of the basics of consolidation to think about how that works and why that might lead to unusual entries to unusual numbers.

So the first thing is we've basically got a business here that has bought another company.

So the year end for both the parent company and the target company, the acquiring company, and the target company is 31st of December, but it bought another business. It bought a Targets company on the 30th of September.

Now we need to think what's gonna happen to the two numbers, to the enterprise value and to the EBITDA.

The enterprise value, as at the end of the 31st of December, is basically going to be the total value of the business.

Now, you could think about that from a balance sheet perspective.

If we think about the balance sheet of the parent company and the target company, the parent company buys the target company, and in its consolidated balance sheet at the end of the year, it basically has the totals for, on a line by line basis for both businesses.

So it has PP&E has the PP&E of the parent company, plus in full the PP&E of the target company, inventory the same, cash the same.

So we're adding up on a line by line basis, the balance sheet of the target parents and the target in full as at the end, because at the end of the year, it owns this subsidiary business in full.

Now, you could also argue that enterprise value isn't just a function of the balance sheet, it's a function of the forecast results, the expected profitability of the business in the future.

But if it owns the subsidiary in full, then it's, you know, the enterprise value is gonna incorporate the value of that subsidiary company in full.

The value that it's gonna generate in terms of future cash flows.

So the enterprise value at the end of the year is gonna show the total in full of the parent company and the target company.

What about the income statement? Well, the income statement, consolidation says the rule, the accounting rules on consolidation say that the income statement is a function of the parent company in full.

And you also add on a line by line basis every line of the target company, but only since the date of acquisition.

So you only incorporate sales, for instance, in this example from the end of September.

In a normal full year, if you own the business in full all year, you'd include a hundred percent of the sales of the parents and 100 percent of the sales of the target.

But here, we've only owned it since the end of September.

So we're only going to incorporate, oops, not four twelfths, sorry about that.

Three twelfths. So three.

So October, November, and December.

We're gonna include those three months from the end of September.

Oh, in the sales of the in the total sales are on consolidation.

So if we look at the sales, we've got the acquiring company, 875, the target company sales were 500 for the year.

However, we're only going to include three twelfths, i.e. one quarter of that 500.

So three twelfths times 500 is basically 125.

So we take our 875, we add 125, and that's gonna give us consolidated sales.

The same thing when we get down to ebitda, we're gonna take the 60 of the target company, but we're only going to include a quarter of that.

We're only going to include 15.

So we take the 125 and we add on 15, which is a quarter of 60, and that gives us the 140.

Therefore, if we do an EV to EBITDA, we're not getting a correct number.

We're basically getting a skewed number.

We're incorporating all of the enterprise value of the target company, but we're only including a quarter of its EBITDA.

So we're gonna get unusual numbers.

We're probably going to get a number that is too big. Enterprise value is too big, um, and EBITDA is too small.

So therefore, what do we need to do to get a correct number? To get a sensible number? We basically need to add on the difference, the first nine months worth of results.

And so if we add on the remaining 45 to the 140, we get an answer of eight hundred eighty five, one hundred and eighty five, which is as if we have owned the business for the full year.

Now, of course, we haven't, we're not gonna change the numbers in our statutory accounts, but this is for the purpose of getting sensible multiples that we can then use to apply to another company.

That's one thing. Next thing, what about the other way around? What about when we get rid of a business? What about when we discontinue a business? Well, if we discontinue a business, the same thing happens.

We de consolidate it.

Now, if we got rid of a business 18 months ago, and we're just looking at the current enterprise value, and we're comparing it to the last years ebitda, the LTM EBITDA, then there's no problem.

That business that we sold 18 months ago has long gone.

It's not going to be in the enterprise value.

The results of selling it probably in cash, um, and the results, the trading results of that business are not gonna be in EBITDA anymore.

But what if we get to the end of the year and we're in the process of selling a business, we're in the process of selling a business.

Now, if we're in the process of selling a business, just let me move my notes around a little bit.

If we're in the process of selling a business, well then what the accounting rules say is they say, you go to your consolidated balance sheet and you take all of the assets and all of the liabilities that you are looking to sell.

And there are lots of rules about here.

You can only do this when you have a concrete plan and then indication of value.

And it's the sort of thing that you can't really pull out of.

So there has to be a really firm commitment to selling this business.

But you take all of the assets on a line by line basis for that business that you are going to sell, and you create a disposal group.

We're basically gonna create two lines a single line, for the assets that we are going to dispose of, and a single line for all of the liabilities that we are going to dispose of.

We basically shrink the balance sheets entries for that subsidiary that we're about to sell, and we put, we shrink it down to just two lines assets and liabilities.

Okay? And we're basically, they're called held for sale, and they're assets held for sale, and liabilities are held for sale.

So it should be easy to identify these in the balance sheet.

And we don't want to include those within the enterprise value of the business because basically they're not part of the ongoing operations of the business anymore.

So we need to basically start with the equity value of the business, and then we need to basically take out those assets and liabilities in getting to the enterprise value of the business, the underlying business, the trading business that we are looking to value.

What about the income statements? Well, the income statements, again, is a little bit tricky.

Often in most sets, in most countries, in most sets of accounts, if you are in the process of disposing of a business, then you basically incorporate or you identify in the net income, you identify the results of continuing, oops, get rid of that.

Apologies for the terrible rising, continuing and discontinued operations.

So you'll split out the results.

So again, that should feel fairly easy.

We can just grab the continuing business and ignore it for the purpose of our multiple.

However, normally what happens in a set of accounts is that is done at a net income level.

And what we want to be able to identify is the EBIT or EBITDA of the continuing business.

And often businesses don't necessarily put that on the face of the income statements.

And so what you'll need to do is you'll need to go and drill down, look in the footnotes, possibly even make some estimates of the performance the contribution to EBIT or EBITDA of that continuing business.

And basically what you're looking to do is to take this out as much as possible so that you are just able to identify the EV and the EBITDA of the continuing business.

Next thing, financing. What about financing? And there's two things that we need to talk briefly about here.

The first thing is, what about debt and equity issues? I'll just give you a couple of instances where this might be relevant.

So if you, for instance, do an enterprise value calculation at the end of the year, and I'll just give you a very simple example.

And you have in the final balance sheets a thousand shares, and at the very end of the year, the share price was $10.

Well, if that business, a few days after the year end did a share split, basically gave every single shareholder an extra share, then what would happen is the number of shares would simply double up to 2000.

And all else being equal, theoretically, the share price should halve, because the market capitalization has to ha has hasn't actually changed.

Uh, the value of the business hasn't changed.

Now, what you have to be really careful of is looking for the current value of the shares at $5, but actually looking at the last balance sheet of the organization and picking up at the last balance sheet, a thousand shares. Because if you take a thousand shares multiplied by $5, you're gonna get a number that is only half the market capitalization.

So just, this is just basically saying, be very careful.

Look for any issues of shares or debts after the year ends.

Don't just take the final year end numbers from the balance sheet.

Look beyond the because this may well have an impact on your EV to equity bridge calculation.

The second thing is, what about a transaction? What about an acquisition? What about an acquisition? Well, often what happens with an acquisition is that you'll give, you'll be given, you'll be able to find some information about an acquisition, and basically you'll have a consideration or a purchase price for an acquisition.

And it sounds quite complicated to think about how that has an impact on the EV to equity bridge, but it's actually relatively straightforward.

If you have got an EV at the end of the year, an EV for the business before the acquisition, then simply, if you, if that business buys another company, then all you need to do is basically as a delta, as a change, is basically put the consideration as the effectively new EV.

So if you basically take over a business and you spend some money buying that business, you know what the consideration is, you know that the consideration is maybe $10 million, then all you need to do is to add that consideration to the enterprise value of the business and get a combined enterprise value for your business, including that new that new acquisition.

And you don't really need to worry about how it's going to be financed, because if it's gonna be financed with debt, that's gonna increase the debt side of the EV to equity bridge.

If it's gonna be finance with equity, that's gonna increase the equity on the same side as the EV to equity bridge.

So in both cases, you don't really need to worry about how it's financed, you simply bolt on or increase that enterprise value to the to give a total or a combined enterprise value.

Okay, and the final slide we're just gonna look at before we jump off into looking at some exercises, it's where do we get all of this information from? Well, obviously the easiest place to go is to them, will go to the most recent statutory accounts. And if that's in the us that's the most recent 10 K or 10 Q.

If it's in the rest of the world, then in most territories the business will produce year end statutory accounts and at the very least, interim or half yearly in sort of interim or cut down accounts. So it just goes to the most recent one of those.

And particularly what you should look at is this thing here.

Look for a note call subsequent events, which is often the very last footnote in a set of accounts.

And they will talk about things that have happened after the balance sheet date in the period until the accounts have actually been published.

And that'll give you lots of these info, lot bits of information about what might have happened in terms of valuation of subsidiaries, sales, of subsidiaries acquisitions and so on.

Also look for press sings or news runs for any other indications in most territories.

Again, companies are obliged to report in press releases to these, to the stock exchanges where they're listed.

Any significant events such as share issues, significant debt issues, changes of share ownerships sales or purchases of parts of the business.

So have a look at in the news and all this slide is really saying is be a little bit careful.

The balance sheets and the income statements of the most recent statutory accounts are not the last place you should look.

You should look beyond that, read around this the business, look at what's going on in the newswires about that business to see if anything has happened that may give you better or more up-to-date information.

So we're gonna jump off.

If you can open up, use the that webinar sorry, use the chat box, and the link in the chat box to download those two sets of Excel.

And we're gonna open up those sets of Excel. We're gonna open up the empty version, which I'm hoping I have already got here.

Here it is. Let me just open up my notes as well.

So those are in the right place.

Okay, there we are. Okay. And what we've basically got here is we've got three tabs, with some exercises and workouts underneath each one relating to acquisitions, disposals, and financing.

Underneath each one, there's quite a lot of workouts. There's a lot more than we've got tote scope to look at in our remaining 30 minutes.

But they'll give you a flavor of the sort of thing, issues we face and the sort of things that you can do to get more accurate trading comp multiples for businesses that have got some of these unusual things happening.

So they're gonna go, gonna go and have a look at the first one, the acquisitions tab, and let me just get a keyboard in front of my spreadsheet.

So here goes, it's a little bit bigger.

So if you can open up the acquisitions one, and you can either just follow along or you could actually have a look at the spreadsheets, open up the spreadsheets at the same, at the spreadsheets at the same time and fill in some of these numbers.

So here goes, let's have a look at this first workout.

It says Health Inc has recently completed the acquisition of target company.

The following data is available.

Please calculate the EBITDA multiples for Health Inc.

What do you notice? So let's just have a little look at this instead of recently incorporated or recently completed an acquisition.

So almost certainly the equity, sorry, the equity value and the enterprise value are gonna incorporate the value of the target company in full.

What we need to be a little bit concerned of is the EBIT, EBIT, or EBITDA numbers, and whether they have a full year's worth of information or not.

So let's just have a little look.

Well, the first thing that we spot, even before we do any numbers, is if we look at the operating profits for these two years from l from the last 12 months to year one, you can see a really big step change.

And that implies that the target company was only acquired not at the beginning of the last 12 months, but towards the end of the last 12 months.

So the last 12 months has only got a relatively small contribution from that target, and it, we have to wait until year one to see its contribution in full.

When we get to year one, two, and uh, three, you can see that the rate of growth is relatively, sort of relatively not modest, but relatively stable, not that extreme. Whereas here, we're multiplying EBITDA by an extra 50%. We're incorporating an extra 50% here, which is a pretty extreme rate of growth.

So let's do our enterprise value. Let's calculate the enterprise value for this business.

And remember, the enterprise value is gonna incorporate the full value of both the parent company and the subsidiary company.

So first thing we do is we go and find the equity value, which is share price multiplied by the shares outstanding.

So 50 times 100 is basically 5,000.

So we get 5,000 of market cap, 5,000 of equity value, and then we go round our EV to equity bridge.

So we add on debts to this number.

So we add on the 250, and we take off cash.

So the net debt is basically 205 hit return, oops.

And I get a number of 5,205.

Let's look at the LTM ebit, ebitda.

So the LTM EBITDA is simply gonna be the operating profit, which is basically EBIT, adding back D&A.

So we simply say sum 200 plus 100, that's the EBITDA number.

Copy that to the right. And there I am.

So again, you can see their EBITDA is really increasing very rapidly, very significantly.

50% increase between the last 12 months and the first year.

And then a more modest increase, you know, 525 to 400, 450 to 525 is what's that? About 75 over 450, so is about 15%.

And then the following year another 75 going up to 600.

So it's, again, it's about 13 or 14%.

It's that first year, which has got the really extreme 50% growth.

So that's what we need to kind of be a little bit careful of.

And of course, if we just simply take these numbers unadjusted and work out the EV to EBITDA, I'm gonna point at the ev, lock it with some dollars and then divide by the EBITDA, copy that to the right.

And you can see the effect in these two numbers here.

In the subsequent year, in year one, I've got an EV to EBITDA multiple of 11.6, and that falls gradually 9.9, 8.7, which is the sort of level that we'd expect that sort of gradual decline.

But this year, going from 17.4 down to 11.6, that implies there's something a little bit odd with that 174, 17.4. It's a real step change.

And the reason why, of course, is that the EBITDA is relatively modest.

We don't have a full year's worth of EBITDA from the target, whereas we do have their enterprise value represented in full.

So, let's go and have a look at workout two.

So out two says, well, what do we do about it? It says, using the information below, calculate health inks proforma, LTM, EV to EBITDA multiple.

So it gives us a little bit more information about what's happening with the, what happened with this target company.

So it said, the Health Inc closed the acquisition halfway through the last reported financial year. So therefore, therefore, you know, we're, we're, we're right, our suspicions are confirmed.

We didn't, we've only included half a year's worth of profit from that target company, which is what's causing that EV to EBITDA multiple to be skewed so much to be so high, unusually high.

It says, assume the acquisition has no seasonality in its numbers.

So again, we have to be a little bit careful with this.

If you had a company such as, you know, a company that made toys, uh, were most of its results, most of its sales, were in the final few months of the year.

You know, October, November, December, in that sort of buildup to the holiday or Christmas period.

Then this, you know, you need to be a little bit careful about the results and about prorating the results here it says they're not particularly seasonal, so it's fair enough to basically prorate the results between the first half and the second of the year reasonably evenly.

So it then gives us a little bit of information.

We've got the same figures here, the share price, the shares outstanding in the total debt.

And then we've got the combo numbers exactly the same as we, Just had but in a little bit of detail.

So we've got our operating profit and D&A 200 plus 100.

That's where the 300 comes from up here, our LTM 300 LTM number of 300 up here.

But then it gives us a little bit more information. So here's the target company, uh, for the full year. Here's the target company for the full year.

And you get right down to the bottom and you've got operating profit and D&A.

Um, so if you, um, highlight these two together, you can see in the very bottom right hand side of Excel, it says that the total is 200.

No, we can do that in our heads.

So we've got 200 of profits for the full year.

So the implication is all we've included is 100 of that in our combined or consolidated ebitda.

So how do we create a proforma ebitda? What we want to do is we want the last year, the LTM EBITDA number to look as if we had owned this business in full for the entire year. And that will give us a valid or more representative multiple.

So that's what we do here.

We say, here's our reported EBITDA of 300, and then what's the calculation here? So the calculation here says we take that C50 and C51, the operating profit and depreciation of 200 in total, and we're adding on another half of that.

We've recognized the second half of the year in our consolidated numbers we need to bolt on or add on the e profit from the first half of the year.

So adding on this 400, that gives us a pro forma ebitda.

Now, again, be careful with this.

We're not actually changing the numbers.

We're not saying we've now, we're somehow gobbling up or capturing that profit from the first half of the year.

It's, that's still not our profit.

But what we're saying is if we had owned this business in full, this is what the profit would look like, and therefore this gives us a more representative multiple.

So let's go and do the same calculation.

So the market capitalization, and I can just point up to where I did these calculations, before share price up to out one, somewhere up here.

Oops, sorry, gone too far.

So market capitalization share price of 50 multiplied by the shares outstanding of 100.

There I am. What about the net debt? The net debt is basically, I'm just gonna use my mouse because it's a little bit quicker.

The net debt is 250 minus 45, that's 205.

And that basically gives us that same EV figure that we had before.

What's my pro forma EV to ebitda, therefore, it's equal to the 5205 divided by that pro forma EBITDA of 400.

And that gives me 13 times.

Now, I'm just gonna push that number back into the first example.

And just, so if it looks a little bit more sensible.

So I'm gonna go up to here.

This is what I calculated previously.

What's the pro forma version of this? The adjusted version of this.

I scroll down to that 13.6 times or 30.0 times.

There I am. So I've got 13 rather than 17.4.

And if I look at 13 and then the Existing calculations, the calculations, which are now absolutely fine because for the forecast years, we're incorporating the business in full, the target company in full.

So it now looks much more sensible.

13 to going down to 11.6, going down to 9.9, going down to 8.7.

That's the sort of level that we would expect the decline or the shrinking of that multiple that we would expect as the EBITDA increases. So there we are, and I think you'd agree that at 17.4 is really pretty wrong.

If the right number really should be 13 that could make a really material difference to a target company if we were using this as our peer, using this as our comparator company.

Okay, let's jump into disposals. Let's jump into the next one.

Lemme Move my notes around as well.

Okay, So here we've got, here we've got a disposal.

It's the other direction.

So it says here premier Inc has the following financials, please calculate the EBIT s multiples.

All financials are in US dollar millions except for share information.

So it tells us we've got his, some selected items from the income statements.

It basically tells us that we've got sales of 107 EBIT of 15.6, and then it says we've got net income of continuing operations.

Now that's sort of interesting. That's our first hint that this business is in, has either made a disposal or is in the process of making, uh, disposal.

So our question is really around that number there Ebit, is that for the entire business? Or is that just for the continuing operations implication would be if it doesn't give us any information about this, um, it's probably for the entire business, including the business, including the parts of the company that we're going to dispose of.

And then we look down to the balance sheet, and again, we see some interesting items as well as all the normal stuff cash and short term investments and short term operating assets, so inventory and so on.

We also have this thing here, assets held for sale.

Interestingly, it's in the short, it's normally in the short term or current section of the balance sheet because the implication is, is we're gonna sell it in the next handful of months.

So here's what we're gonna get rid of 11.2 of assets.

And then if we go down a little bit, we've got operating assets and financial assets.

Financial assets are basically debt.

And then we've got short term financial liabilities and short term operating assets.

So things like accounts payable.

We also, again, have liabilities held for sale.

And I'm just gonna do a little calculation here, which is, what's the net amount of these assets and liabilities, the net amount that I'm gonna sell.

And the answer is it's that 8313.

So I'm basically, I've agreed that I'm gonna sell part of my company and I've got a fairly good indication of how much it's worth, which is this 8313.

We've written this down basically to it's the amounts I'm gonna get.

Now, the imp interesting thing is the accounting standards say that if you think you're going to get less from these from these assets on the balance sheet, then they're held on the balance sheet.

You should write them down. However, you are not allowed to write them up.

So if we are gonna sell these assets and we're gonna get more for them than 8313, they have to be held on the balance sheet at 8313, even though we think we're gonna sell them for more.

So that's one of the issues.

So let's go and have a little look.

Let's do our EV to equity bridge.

So first of all, we'll start with our standards equity value.

Let me just move my notes around a little bit just so I can check that I'm getting the right figures.

Okay, so let's do our equity value. It's down here.

So we're gonna say equals the share price.

We've got just listed there, multiplied by the number of shares.

That gives me a figure of 221.

And I'll just put formulas on the right hand side so we can follow this as we go.

Then we'll go round our EV to equity bridge.

Let's find our net debt.

So our net debt is long term financial liabilities, plus short term financial liabilities, which is somewhere up there minus cash somewhere right up at the top of the balance sheet. There we are cash and short term investments.

It gives me a figure of 18.

So again, we're going round the EV to equity bridge.

Start with enterprise, start with equity value, add on debt.

What else do we need to adjust for? Well, we've got these things called non-controlling interests. Now, a little aside, what's a non-controlling interest? This is when you have a subsidiary and you don't own all of the subsidiary. Perhaps you own 80% of the subsidiary.

Somebody owns, somebody else owns 20% of the subsidiary.

You consolidate a hundred percent of the line items, a hundred percent of the balance sheet, a hundred percent of the income statements.

And so although you are consolidating it in full, you don't own it in full, somebody else has an investment in that. Someone else is effectively financing that.

So this is another adjustment in the EV to equity bridge because the non-controlling interest is financing a part of the business that you are consolidating in full.

It's just really another form of finance.

So I need to add this on non-controlling interest of 4716.

I've then got non-operating assets.

So this could be, you know, in financial investments.

It could be basically somewhere where I've basically, um, uh, just parked some money.

It could be non-core assets.

So things like, you know, a building that I rent out something like that.

So I'm gonna go up to non-operating assets, which is somewhere up here.

There I go long term financial assets. So that's the number I was looking for.

And I'm gonna make this negative because this is on the left hand side of my EV to equity bridge.

So I basically it's a little bit like cash that I've just parked for a little while.

I've then got net assets held for sale.

And again, I'm gonna make this negative.

I'll talk about this in just a second as to why.

So I'm gonna say plus 2890, and then minus the assets, which is that 11203.

And that gives me that negative figure of 8313.

Why is it a negative? Well, the reason why it's negative is that it absolutely has value.

The balance sheet tells the market that we're gonna hold this, we're gonna hold this, um, these amounts, and we're gonna sell them. We're gonna sell these amounts in the near future.

When we sell these amounts in the near future, they're gonna turn into cash.

Now, where's cash on the EV to equity bridge? It's a negative. Basically it is something that has value in the market capitalization in the market cap of the business.

So, that's why this is a negative. Just think of it, you know, in the future this is gonna turn into cash.

Cash will be negative within the EV to equity bridge.

So this is negative, um, as well.

And that then gives us the enterprise value, the value of all of the trading bits of the business 222.

So what's our EV to EBITDA? Our EV to EBITDA is so EV to EBIT.

S not ebitda, EV to EBIT is simply their enterprise value divided by.

And then let's go all the way up here and find the EBIT number and it's the 15.7, okay, 14.2, and then it tells us, we're gonna give you some more information so you can adjust this number, get a more representative number.

And the two questions that we want to answer are these two here.

It says, what else would you want to find out? First of all, we've got that 15.7 number for EBIT.

Does that include the EBIT of the business that we're going to sell or not? Because ideally, if we're just trying to find EV to EBIT for the ongoing business, we don't want the EBIT from the discontinued operations in them.

So can we pull out, can we extract the discontinued EBIT from that 15.7? Second thing is those net assets held for sale, that's 8.38313.

Is that what we are really going to get? Or are we gonna actually get more? In which case if we know we're gonna get more and the market perceives that we're gonna get more than that those, that adjustment for assets self held for sale should be a different number.

So it then tells us a little bit more information.

First of all, after digging through the financials, we've got a little bit more information. It says the EBIT of the discontinued operations, which is included within that consolidated EBIT is 3.4.

So quite a big number. So we need to reduce that 15.7 by this 3.477.

Here. Secondly, and this looks a little bit complex, but it says on the 7th of July, in the prior year, the group sold 24.8% of MDL. That's a subsidiary to ABP, another company for a total amount of US dollar 10.4.

So that's, and then it says, this results in the creation of the entire non-controlling interest. So that non-controlling interest we adjusted for before was made up of this transaction of the 24% owned by somebody else owned by ABP.

The implement the agreement further included the option for ABP to acquire premier's remaining shareholding in MDL at a price of 181 per share.

On 4th of January, just after the year end APB exercised its option to acquire the remaining 183.5 million shares.

So we therefore can work out how much they paid for the shares for the remaining 75% or at stake in that subsidiary.

So the first thing we can do is we can calculate this market value of the, those shares.

Basically what we're gonna get paid for those shares.

And that's gonna represent those the carrying value, sorry, not the carrying value, the actual fur value of those assets held for sale.

So let's work this out.

We can just put them, we can just key the numbers straight in.

Here we go. So we can say equals, and it is $181 per share multiplied by 183.5 million shares.

And that basically gives me a figure of 30, it would, if I had keyed the correct numbers.

33,2 million.

So very different number to the 8.3.

So we're gonna get a lot more. That's good news.

And therefore the market is almost certainly, if this information is public, the market is almost certainly valuing our market capitalization, assuming that we're gonna get this amount of cash in the near future.

Therefore that's one of the reasons why the market capitalization is so high.

But therefore, we're also gonna have to adjust by this much higher number in getting to our EV. Number. Next, what's the EBIT adjusted for those discontinued operations? So we're gonna go up to the very top.

We're gonna find that EBIT number of 15.7 there, and then we're gonna subtract, uh, the 3.477.

And this gives us a smaller number for ebit SA smaller number for the EBIT of the continuing operations only.

Okay, so let's go and reformat reschedule our EV to EBIT bridge, sorry, EV to equity bridge.

So we're gonna start with our equity value that's unchanged.

So we just need to point at the equity value up here.

And,there it is. The net debt hasn't changed.

So again, I could just copy this down and there I am.

What about non-operating assets? I think I can just pop these in there. We are now need to pause a little bit on the non-controlling interest.

And you might remember in the non-con controlling interest up here, we had this figure of 4.7, but it told us in the detail in the footnotes that the non-controlling interest the non-controlling interest resulted entirely from this stake, this 23 point, 24.8% stake in, this subsidiary.

So if we're gonna sell this subsidiary and we're trying to extract all of this stuff out of our accounts to give us a much more representative EV to EBITDA multiple, then we can get rid of that non-controlling interest as well.

We can basically say it's gonna disappear as soon as this transaction goes through the non-controlling interest disappears.

And we're basically incorporating within our, uh, EV equity bridge here, all of the adjustments as if this has happened, as if this amount is gonna go through.

Finally, we have the assets held for sale, which are the market's value of these.

So I'm gonna point that at that 33 that we just calculated, multiply by minus one.

And in the same way the market is basically assuming we're gonna get this in cash a few days after the balance sheet.

Because that's what it tells us actually happens.

We're gonna get this in cash, so we're gonna put this on the left hand side, it's a negative item.

And going from the equity value to the enterprise value, I go to the bottom, I do ALT equals add all of this up, and I get an enterprise value of 193.

I can then do a much more sensible, much more accurate calculation.

I take the 193 of enterprise value just relating to the continuing business.

I divide by that by the EBIT number for just the continuing business, and I get a number of 15.8.

Okay, how does that compare to my previous number? That was 14.2.

So again, really significant difference for, a really significant difference for this taking into account that at disposal.

Now we're gonna do one more just about got time to get through this.

I'll go pretty quickly on this.

So I've got one more and this is about some of the financing items.

So I'm gonna jump into this pretty quickly.

So here goes this tells us right at the very top it says the 10 K of American Tower Corp has just been published. Please calculate the EV to EBITDA multiple.

And there are a couple of things that we just need to, bear in mind.

It says, ignore the impact from any options. Treat operating leases as financial obligations and long-term obligations are all interest bearing and include finance leases.

So it's really the leases bit that we need to be cognizant of here.

So just need to pause a little bit and talk about leases.

Under, IFRS 16 and under US GAAP finance leases are basically treated as, as if you had borrowed to buy an assets, you have a right of use assets, and then you have a li a lease liability, which is, represents the present value of your future lease payments.

But the, the, the accounting standards basically force you to treat it as if you had borrowed to finance the right of use assets.

So if we are going from an EV to EBITDA if we're aiming for an EV to EBITDA multiple, then going round the EV to equity bridge, we need to incorporate the lease liabilities within the net debt.

We also need when we get to EBITDA, to basically take out anything related to lease payments because the lease payments should be reflected in depreciation and amortization.

And also interest not any lease payments going through cost of goods sold or sg and a.

Now under IFRS, then basically that applies to both finance leases and operating leases.

Under the one difference is in US gap under operating leases, um, the lease liability isn't necessarily shown within net debt and the lease payment normally appears within cost of goods sold or SG&A.

So we need to take that out because it would be captured under IFRS.

If we are doing an IFRS equivalent, that would be captured in depreciation and interest.

So that's what this is doing here.

It's saying I've got a US company and basically what I want to do is to get an EV to EBIT multiple as if the leases were all financing items, whether they're operating or financing.

So I'm just gonna go through this and just identify the things that we need to pick up at the top here. We've got EBIT, D&A and share price and shares outstanding.

So we can do our normal, um, enterprise value calculation as we scroll down.

And I've got just make this red so we can see.

I've got cash at the top, which I can incorporate within my EV to equity bridge.

It tells us in the preamble, to assume that, accrued interest, lease liability and long term obligations. These are all financing items, so I need to basically include them within my net debt calculation.

I've then got those long-term obligations, which it says are all lease, all interest bearing.

So basically they should be within financing.

And then I just also need to be a little bit careful.

I've also got redeemable non-controlling interests.

So NCIs as we saw before, we basically are an external form of finance.

And we've got another NCI down here as well.

Final item I just need to include right down at the bottom of this list.

I've got a single item and it says operating lease cost.

So this bi this amount here is basically this is basically the rent within SG&A and cost of goods sold that we need to make sure is not included within EBITDA.

Because under an IFRS approach where we're including lease liabilities as financing items, this would basically be depreciation and interest, which is obviously not within EBITDA.

So let's go through this really quickly.

Just a couple of minutes. I should be just about able to do this, just to get my notes in the right place so I can do this. And I know where I'm pointing, so, Okay.

So equals So let's go find the equity value.

So the equity value is right at the top, right at the very top.

it's the share price multiplied by the shares outstanding. There we are.

I'll just put the formulas alongside it. There we go.

Okay, what about those non-controlling interests? So an awful lot of these are just gonna be keying in the numbers that we can see on the balance sheet.

So the normal non-controlling interests were 474.9.

The non, uh, the redeemable non-controlling interest.

212.1.

There we are equals 212.1.

There we're the long-term obligations.

It tells us those are interest bearing 197.7

Let me just put an equals at the front of that just so you can see.

What about the other items? Those are current.

The current portion of a long-term obligations equals 798.8.

The long-term operating lease, a big number here 6884.4.

Current portion of operating lease still, uh, extra lease.

Liabilities that we're incorporating as a financing item equals 539.9.

Crude interests. Again, we can see that there at 207.

It's on the face of the balance sheet. 0.8 cash.

Make this negative equals minus 1746.3 get down to the bottom and we simply add all of that up and we get our enterprise value, basically treating leases as financing items.

What about the income statement side of it? Let's just go and grab that EBIT s number from the very top.

There it is, 2887.

And I know that the D&A is the number under underneath, so therefore I can add that figure.

The final thing to add back is the operating lease expense.

I know that's incorporated within the SG&A or cost of goods sold.

So I need to add that back.

Because if we treated lease as financing items, we wouldn't have that in there.

That gives me an EBITDA figure of 5 7, 4 7.

And then finally I can do my EV to EBITDA ratio and it gives me I dunno quite why I've got a hash symbol at the end. There we go. 23.6.

So it gives us a realistic number, and that would be useful if you were trying to use an American company with American US GAAP way of treating leases.

And you're trying to use that multiple to apply to a European company that was using IFRS 16, and therefore all of its operating leases were captured.

Were basically accounted for as if they were finance leases.

So that's it. We've gone through a, rattled our way through.

A lot of adjustments here in terms of getting more accurate EV to EBIT and EV to EBITDA multiples.

There's no getting away from the accounting treatments here.

IF you want to dig around a little bit deeper, then go into Felix. There's loads more information on Felix.

I hope that's been useful.

Last little minute on this.

I hope that's been useful. I hope that's been informative and look forward to seeing you on another one of these webinars very soon.