My name is Maria Weber.

I'm one of the trainers at Financial Edge and I am going to be taking today's Felix Life session on valuation fundamentals.

So we are going back to the absolute basics.

If you know nothing or a little bit about valuation, you are definitely in the right place.

We are doing the absolute basics.

Yes, things definitely get more complicated than this, but that is not what we are looking at today.

At the end of the session, I'll show you where you can find more complex stuff on valuations.

If you want to continue from where we leave off at the end of the session, please don't be shy to ask a question.

Okay? There is honestly no such thing as a question that's too basic or stupid.

We are here to get to grips with the absolute fundamental concepts.

If you go to Felix Topics, if you go right at the bottom to Felix Live topics, Felix Live, if you click on that, it'll open all of the historic Felix lives and the upcoming ones.

If you just scroll quite a way down to the upcoming ones, you'll see, there we go, today's session valuation fundamentals, and if you click on that, you will come to this page. That's the link that I've put in the chat.

You'll see there's three documents here.

The one that I'm gonna be using is the one that says class next to it, and I'll explain why I wanna use that one in a moment.

So please do follow along with me and as I said, ask any questions as we go.

I'm just going to paste this link one more time because people that have just joined won't be able to see the previous chat.

Let's talk about what we're gonna be doing.

We've got an hour.

We are gonna be making sure that you understand what equity value is and what enterprise value is and the difference between the two.

We are then going to end off with an introduction to multiples.

So we're gonna look at equity multiples and enterprise value multiples.

We are not gonna be doing DCF, which is discounted cash flow.

Next week's Felix live session is on DCF fundamentals, so please join for that.

If you wanna learn about the basics of discounted cash flows, I've got a couple of slides just to help us through some key concepts. You don't need the slides as long as you've got the Excel to follow along, you are good.

Before we go talk about equity value, let's just think about why we might wanna value a company.

I could have a publicly traded company on a stock exchange and I want to look at its value.

So I wanna calculate its equity value and I wanna derive its enterprise value from that.

So I could look at a publicly traded company, I might be doing that for purposes of acquisitions.

Maybe I want to buy the company.

I could be looking just to see how is a trading relative to other companies? Is it overvalued, maybe undervalued? If I'm an equity research analyst, I'm gonna be doing a lot of detailed analysis because then I'm gonna give a recommendation in my report on, oh, I actually think the share price should be 80.

It's currently trading at 65. That's a buy recommendation.

I could also be advising a company on an initial public offering.

So we've got private companies that are not listed, they do not have an observable value.

Of course they've got a value, it's just not something that's quoted and publicly available on a stock exchange.

So if an unlisted company wants to go public and list, I need to advise it and say, okay, I think your shares are going to be worth $30 per share when you list.

And to do that, I'm gonna look at different techniques, but one of which is to look at similar listed companies, see where they're trading, and then apply that to the company I'm trying to value.

Okay? So lots of different contexts in which we do valuations.

I'm not going to focus on the context because we start getting a bit more advanced now, but if I'm looking at acquiring a company doing an acquisition, I'm probably gonna have to pay a premium.

So let's not get caught up in that for now.

I want to know what is the equity value of a company and what is the enterprise value? How do we move between the two and what are multiples? Let's start off with talking about equity value.

Equity value is the value of the shares of the business.

It is the value of the ownership stake in the business.

To go back to a basic financing structure for a company, a company needs money, it needs funding.

It can get that funding from shareholders which buy the shares of the business.

They are the owners of the company.

They get what is left in the business after everyone else has been paid.

A company could also raise debt.

So go borrow from banks or other private lenders.

They could go to the bond markets that is debt.

Okay, here I'm looking at equity, the ownership stake in the business, the shareholders.

What are those shares worth? As I've already mentioned, if you are not a publicly listed company, you will not have a readily observable share price because your shares don't trade every day.

Yes, they might change hands privately, but that is something that doesn't happen very often, right? The shares aren't liquidly traded.

So let's look at valuing a traded company.

We are gonna take their traded share price and we're gonna multiply that by the number of shares to get the equity value.

This is also called market cap, if you hear that term market capitalization or market cap, let's go to our spreadsheet.

I'm just going to paste this in the chat one more time.

The link for those of you that have just joined, I'm in the class document and you'll see when you open it up that there are a few different tabs, the workout, that's just exercises to check your understanding of the concepts.

They are great exercises to do, but I thought for today, because we've only got an hour, it might be nice to look at an actual real listed company.

And so I've picked Coca-Cola because I think it's a company people are at least familiar with its products.

So we are going to be doing something a little bit different.

But you will see that the full file has got all of the answers to these workouts, which will be great afterwards to check your understanding for now, what I want us to go to, I'm going to skip over the first few sheets and go all the way to the end.

KO valuation, Coca-Cola's value.

There's already some stuff populated here.

Let's not worry about that.

Let's go to Felix and get the information For Coca-Cola.

I'm gonna type in Coca-Cola's ticker on the analyze page.

The risk with typing in Coca-Cola is there are a couple of other bottling companies I think that are also Coca-Cola, but it's not the main Coca-Cola that we know as the main, you know, parent company of the group.

So Coca-Cola KO is the ticker. We can see it's listed there on the New York Stock Exchange.

If I click into that, you might land on a different page to me, but we are gonna go to the valuation tab.

And on the valuation tab, we are gonna be looking at this bridge today.

So the bridge is just a fancy name of saying how do we navigate from equity value of a company to enterprise value and vice versa, we have to go over the bridge one way or another.

Let's start with looking at Coca-Cola's equity value.

Coca-Cola is a listed company.

We can see its share price as of yesterday's close at the top of the screen.

We see it's from the 6th of March, which was yesterday is $70.46.

So let's go to our spreadsheet and put that in share price, 70.46.

We then need to multiply by the number of shares and this is where things start to get a little bit complex, but I'll show you at the end of the session if you wanna learn more about dilution where you can find that.

Let's first look on Felix shares outstanding in millions.

The 4,301, if you click into that, it'll take you to Coca-Cola's latest filing with the SEC, and that's the 10 K from 31st of December, 2024.

They file a few weeks after the year end.

And so you can see as at the 18th of February, 2025, they've got 4.3 billion shares outstanding.

So that's the number of shares.

However, what we also need to take into account is dilution without getting into the technical details of that dilution results, because the company has issued things that could become shares in future, and those are share options that they've issued to their employees, which basically allows their employees to get shares in future at a discount that causes dilution.

And we do take that into account.

So you can see it's a small adjustment, 14.5, but the number of shares we should be using to work out the traded market cap of Coca-Cola should be the fully diluted number of shares.

I'll show you a playlist at the end where you can find how to do the dilution calculation.

So let's take that 4,315.5 4,315.5 as our number of shares outstanding.

And so equity value is the share price times the number of shares, which is 304,070.

So 304 billion US dollars.

That's what the owners of Coca-Cola have.

In terms of value, please, any questions, don't be shy. Come into the chat. If you don't have access to the chat or if you're shy to ask in the chat, you can come into the question and answer pod.

I wanna now go and look at Coca-Cola's balance sheet because I think sometimes people don't realize that the balance sheet does not show the market value of equity.

What I've done in our spreadsheet is if you go to the previous tab, we have got KO balance sheet.

All I did just to speed things up for class, if you go to the categorized tab sure, sorry, someone's just asked for the link to where you can find the spreadsheet.

Let's see if I type an answer. Hopefully that works.

Do let me know if you've got that or if you need, need to try and get that to you another way.

Hopefully that's worked.

Great. Brilliant. So where I've got that balance sheet from, just to speed things along a little bit.

If you go to the categorized tab where we've got all of the filings, if you go to the 10 K, that's the latest filing for Coca-Cola, their annual report.

Instead of going into the whole annual report, we've got these extracts here in Felix, which is super convenient.

I just clicked on the balance sheet extract.

So this is the actual balance sheet.

I copied that balance sheet and I pasted it into my spreadsheet and then I just neatened it up a little bit and I deleted 2023 because we don't need that.

So that's all I've done.

Actual Coca-Cola data being brought into my spreadsheet over here.

Simple accounting, one side of your balance sheet, you've got the total assets of the company.

In Coca-Cola's case, this would be things like the cash that it's got, investments it might have, it's got receivables where it sells things on credit, it's got inventories, it's also got longer term assets, like longer term investments.

It's got the property, plant and equipment that they actually use to make and sell the drinks.

Okay? And that gives us the total assets on the one side of the balance sheet.

On the other side of the balance sheet, we've got all of the liabilities, which is stuff that Coca-Cola owes to other people.

So that's liabilities.

So here we can see they've got accounts payable, they owe their suppliers, they've got some debt loan notes, long-term debt.

They've also got equity, right? So that's the other part of the second side of the balance sheet. We've got the liabilities plus the equity.

There are different elements to equity.

So from row 28 to row 32, those are the balance sheet items that equity is typically broken down into.

Now again, this is only about valuation. We are not doing accounting, but a very brief explanation here, common stock and capital surplus, that's sometimes called share capital, common shares and share premium.

That is the value that Coca-Cola received when they originally issued shares to the public.

They do a new share issue, they put in what they receive here.

But guys, Coca-Cola shares are traded every single day amongst people in the market.

And since Coca-Cola raised that money, the value of Coca-Cola has changed dramatically, right? So that is not reflected in this balance sheet.

Yes, equity does grow in the balance sheet.

If a company were to issue more shares, yes, equity goes up and equity also grows by the retained earnings every year as Coca-Cola makes a profit, whatever's left once everyone else has been paid interest tax, everything else, that then gets added on to what belongs to the shareholders.

If Coca-Cola then pays a dividend, that then goes down.

So there are some other complicated accounts here, let's not get caught up in those.

But these elements are what make up the book value of equity.

Now I'm gonna be using this little schedule I set up on the right for another purpose, which you'll see in a moment.

But let's go put in the book value of equity. Book value of equity.

I add up the sum of these equity items from row 28 to row 32, and that gives me a book value of Coca-Cola's equity of 24,856.

Can you see how different that is to the market value of Coca-Cola's equity? When someone wants to become an owner in Coca-Cola, I wanna buy Coca-Cola today I'm gonna look to the future and say, okay, what do I think as an owner I'm going to get in future from owning Coca-Cola, right? And so instead of me looking at book value of equity of 25 billion, if we go back to what we actually calculated for Coca-Cola, the equity's worth 300 billion.

So that is equity value.

Any questions before we move on to starting to talk about enterprise value and how it is different? Okay, good.

If everyone is okay, let's move on to talk about enterprise value.

Good example to start with is thinking about a house.

I wanna buy a house, it's worth £500,000.

I then have to decide how I'm going to finance that.

In most countries, you can't get a mortgage from a bank unless you put down some of your own money as well into the purchase.

That is your equity, right? That is what I own in my house.

So say I've saved up money, I put down 200,000 worth of equity, I then go to a bank, I get a loan mortgage, which is debt.

The bank gives me 300, I take that 500 and I now buy my house for 500.

How is this relevant to company valuation? Oh, I see.

A question has come through from Andrew, just looking at why we've got negative figures in the balance sheet. So let's quickly just go back to that K balance sheet.

These negative figures here.

So Andrew, without getting too complicated, the first of these accounts is accumulated other comprehensive income or loss.

What this means is there's certain things that are bad, bad for profitability of Coca-Cola potentially in future.

That's why it comes through to this account.

So think about if you've maybe got a derivative contract and there's a loss on that derivative, it's like a loss effectively.

So that's why that one's a negative. It's not always gonna be negative.

And the second one, treasury stock, the reason that's a negative is Coca-Cola has bought back some of its shares.

So since it issued these original shares, they've done some share buybacks and you show those share buybacks if you don't cancel the original shares as a negative.

Okay? So hopefully Andrew that satisfies for now.

But if not, please do follow up with another question.

So getting back to our house example, how does this relate to enterprise value versus equity value? We've just done equity value.

The value that belongs to the owners, the value the shareholders put in enterprise value is this asset value on the left.

Now in finance, I think in a lot of professions there's often abbreviations and sometimes you might not be sure what they mean or you might get confused.

Do not be shy to ask.

EV generally means enterprise value, not equity value, even though they both start with an e enterprise.

Value is the value of the business independently to how it has been financed.

Enterprise value is the value of Coca-Cola's operations.

The reason we find enterprise value so useful as analysts is because of this independence from financing, it's not affected by the way it's financed.

Okay, that house I wanna buy for 500,000 pounds, if I won the lottery tonight, I would not need to take out a mortgage.

I would then fund the entire purchase with 500 of equity.

Can you see that doesn't impact the house's value.

The house is still worth 500, right? If I actually don't have that much savings and I decide actually I can only put in a hundred of equity, that means I'm going to have to get a mortgage of 400.

That doesn't change the value of my house. How I finance it.

And we want to apply the same things to companies.

Equity value can be very different depending on how a company is financed.

Now that doesn't mean the company is undervalued or overvalued or it's a good or bad company.

It just is the way the company's finance that affects the equity value.

If we think about this in reverse, say I now want to sell my house, okay? So say I sell my house and let's say I sell it for 500,000.

What I've gotta do with the 500,000 I get from selling my house is I first have to pay off any debt that I owe.

So I've gotta pay my mortgage back of 300 and then whatever's left belongs to the equity holders.

So then I can say, okay, what's left for you out of that 500 is 200.

Can you see how this would be very different if I sell my house for 500, but actually I've got a massive mortgage of 450 that I need to repay.

So then what belongs to equity holders is only 50.

Doesn't mean that the equity's undervalued, it's just because of how the company is financed.

Okay, this I'm gonna come back to when we talk about multiples at the end of class.

For now, I want to focus on us calculating this enterprise value, not using a house example, using Coca-Cola.

This slide five is what we're gonna be doing now for Coca-Cola.

And you can see we've got the debt, which is our mortgage. We've got the equity, which is the same, but we've just gotta be a little bit more technical now about how we split up the balance sheet.

So let's go back to our balance sheet for Coca-Cola.

I'm gonna go to the KO balance sheet tab.

We were already looking at the equity for the balance sheet.

Now please bear with me.

This is going to feel like we are doing a lot of accounting.

This isn't an accounting session, but I really believe that if you see this, it helps you understand what we are doing with enterprise value.

Let's start going through Coca-Cola's balance sheet.

And what I want to do, can you see on the right hand side here, I've got my good old accounting equation assets equals liabilities plus equity.

That's the balance sheet.

All I'm going to do is I'm going to condense the balance sheet from so many line items.

I'm just going to categorize the different things on Coca-Cola's balance sheet.

Let's start off with getting cash from co Coca-Cola's balance sheet.

So there's Coca-Cola's cash and cash equivalence.

So Coca-Cola's cash is 10,828.

Now Coca-Cola might have other financial assets.

Cash is a financial asset. It's the result of my operations, right? Cash is cash.

Cash, if I've got cash, it's not generating sales.

Cash is just sitting in a bank account, right? I could have excess cash that I invest.

So I could have short-term investments, I could have long-term investments.

These are financial assets.

Please bear with me. These colors start giving you a little bit of of a headache after a while, but hopefully it makes it easy to follow.

Let's go pick up the financial assets Coca-Cola has. So they've got short-term investments.

They've got marketable securities.

Marketable securities just means things that are easy to buy and sell readily available price. They're marketable, they traded, they listed.

So Coca-Cola's got some short term investments.

So that's under current assets.

If we look to the longer term side of things, they've also got some equity method investments.

Without getting too technical here, this, it's called equity method.

Because you have to account for it in a certain way.

Where a company owns normally more than 20% at less than 50% of a company.

You call it an equity method investment.

Interestingly enough, Coca-Cola actually owns about 20% of monster monster energy drinks sitting in that 18,087, okay? That's a financial investment.

If we add up these financial assets, so I've got the two short term ones and I've got the longer term investment, I get 21,830.

Let's now look at the operating assets of Coca-Cola.

Operating assets of things that arise as a result of your operations or that you need for your operations, right? To put it in a better way, this is stuff that's part of what you do.

If I wanna start a beverages company, I don't need to have short-term investments.

I don't need to have marketable securities, I don't need to have equity method investments, right? But what I do need is stuff like property plant and equipment inventories, receivables, that's part of a beverages business, right? Part of the day-to-day of your business.

So all of these other assets, trade accounts, receivable, inventories, prepaid assets or prepaid expenses, rather, deferred tax assets.

Basically, you can think about it, I'm kind of owed a bit of tax back property, plant and equipment, trademarks, goodwill, and other non-current assets.

Those are all operational assets, part of the beverages business.

So I'm gonna sum that up and I get 67,891.

And let's just check that we haven't made a mistake.

If I sum the total of what I've done here, 100,549, which is exactly agrees to my total assets, okay? So I've just condensed that down into these categories.

You'll see why in a moment. Bear with me.

I know this feels like accounting.

I promise you we are going somewhere.

Let's now look at the operating liabilities of Coca-Cola.

If I now go to the other side of the balance sheet, I've got accounts payable and accrued expenses.

I owe suppliers money.

I owe my electricity bill loans and current maturities of long-term debt.

Those aren't operational liabilities, that's a financing decision.

I have borrowed money if I want to start a beverages business, I don't need to have debt.

I could finance my business with equity.

That's separate to the operations.

That's a financing liability financing decision.

So we are not gonna include that in our operational liabilities.

Income taxes, yes, I owe taxes part of my operations on the long-term side of things, we've got some long-term debt and then I've got other non-current liabilities and some more tax liabilities.

So all of those ones we've highlighted, let's add them up to get to our operating liabilities for Coca-Cola.

So that's from the current side of things.

And for those of you that aren't familiar with accounting, current just means you expect to repay this liability within the next 12 months.

And then we've also got longer term liabilities that you expect to repay after the next 12 months.

So if we add all of those together, my operational liabilities for Coca-Cola is 29,655.

Then we've got debt.

Debt we've already identified.

Let's just give it a slightly different color debt.

This is borrowings from banks or from bond investors.

So it's the loans and the notes and it's my long-term debt, both the part of the long-term debt that I have to repay within the next 12 months, that's the 6 48 and what I have to pay after the next 12 months, that's the 42,375.

So if we add up all of those debt items, the loans, it's the current maturities and it is the long term debt.

And then finally we've got something called NCI.

Again, it's a little tough if you're not familiar with accounting, okay? You might not be familiar with what NCI is in our short session.

We don't have time to go into all the detail, but let's talk about it at a high level.

NCI stands for non controlling Interest and it sits here under the financing part of the balance sheet, okay? It's not under the asset side, it's under the liabilities and equity side.

To briefly explain NCI, when Coca-Cola or any company, if you control another company, you've got to consolidate it into your results control.

Generally speaking, you own more than 50% of the company.

So if you own more than 50% of a subsidiary, so say Coca-Cola owns a bottling company, they need to include 100% of that subsidiaries, assets, liabilities, profits, et cetera, into their own balance sheet.

So in this property, plant and equipment won't just be Coca-Cola's, PP&E. It'll be Coca-Cola's, PP&E plus the subsidiaries, PP&E for every single line.

But what happens if Coca-Cola actually only owns 80% of that bot bottling company? They have to, according to accounting rules, consolidate 100%.

But then surely at some point we've got to say, wait a minute, we actually don't own 100% of what we've brought in.

We only own 80%.

So how do I show that 20% that's owned by somebody else? That's what NCI is.

That NCI shows the part of our subsidiaries that effectively belongs to somebody else.

So it's effectively part of the funding of what's been incorporated into my balance sheet.

So that is NCI.

It's part of funding and I'll show you a playlist at the end if you are interested in learning a little bit more about that.

Consolidation, accounting, what NCI is, I'll show you where you can find that.

Let's add this up. And then guys, we're gonna finally, it feels like we're doing accounting here.

I promise you we are not. We're going to get to the valuation in a moment.

My balance sheet balances, right? So I'm confident that I have picked up all the items, I've classified them correctly.

Any questions before we move on and reveal how this relates to enterprise value? Okay, I'll keep an eye on the chat in case anything comes through all in the Q and A pod.

Okay? Let's see.

Why am I doing all of this balance sheet analysis with you? I am now gonna just rearrange this balance sheet slightly differently, not how accountants would do it, assets equals liabilities plus equity.

But rather what I'm going to do is I'm going to knit off the operating assets and operating liabilities with each other.

So you can see I already pre-populated the cash is just flowing through straight from above those other financial assets flowing through straight from what we did above.

But now what I'm gonna do for my operating assets, can you see keyword here being net operating assets? I'm going to net off the 67,891 from above on the operating asset side.

And I'm going to net that off.

I subtract the operating liabilities.

Let's get a total to check that we have got a balanced balance sheet at the end of this.

What I've got on the right hand side, you can see is just pulled through exactly from above.

So that debt that we calculated, that's not changing the NCI that we calculated not changing, we've got that.

So it's just reclassifying it, just rearranging the balance sheet slightly.

So whoops, let's just do that again.

So we've got this NCI and then we've got the equity.

And if we add this up, we can see our balance sheet does balance.

I just see a question has come through in the q and a. So let's see, how did we find the operating assets and liabilities and the debt? So let's just double check here. These operating assets.

So operating assets, that's everything. That's not financial in nature.

So anything that's not a financial investment like cash or short-term investments or long-term investments.

So those are all the operating assets.

Then the operating liabilities, those are all of these gray ones here.

So anything that's not debt is an operational liability.

So creditors electricity that I owe, taxes that I owe, okay? And then the debt is actual debt borrowings or issuances of bonds, okay? And then all I've done here, these numbers flow through straight from the top.

I've just linked, I've kept them the same. So I haven't copied them down. If you copied down, your formula are gonna be all messed up.

So my cash stays the same.

Other financial assets is the same.

The only thing that I've done differently here is I have netted off the operating assets with the operating liability.

So everything else is the same.

Okay, hopefully that clarifies, but just let me know if you have a follow-up question.

Okay? So why have I shown you this guys? This net operating assets.

That is the enterprise value.

That is what I am valuing when I am valuing the enterprise value of Coca-Cola.

It is the value of Coca-Cola's operations outside of co Coca-Cola's operations.

They also have some financial assets and cash that makes up the total value of everything in Coca-Cola, the operations plus any other assets they might have.

I then say, okay, who does that belong to? That belongs to everybody on the right hand side, debt holders, the NCI and then equity holders have the remainder.

Now I put EV in inverted commas because this is the book value of the operating assets minus operating liabilities.

Guys, that does not reflect the value of Coca-Cola's operations book value of property, plant and equipment.

That's what Coca-Cola pays for its property, plant and equipment minus depreciation.

If I buy co Coca-Cola today, I'm not looking at buying their property plant and equipment.

I'm buying what they are going to do with their property plant and equipment, which is make and sell drinks and generate loads of future cash flows for the business.

So I need a way to come up with this enterprise value, but like a market value of it, not the book value based on the balance sheet.

And this is where we can do various things.

If you are a listed company like Coca-Cola, I've got the market value of equity.

We just did this on our tab on the KO valuation tab.

So I can say, okay, Coca-Cola's equity shareholders are placing this value on it.

And then I can just go over the bridge and say, well, if equity is worth 300, I know what everything else is worth.

I can then derive what the enterprise value is.

Let's do that On the KO valuation tab.

On the KO valuation tab.

I've recreated our little calculation to the right hand side here, okay? What I'm going to do now though is for equity, I'm not taking book value of equity, I'm taking the actual equity value of the traded shares.

That's what I'm taking. That's the equity value NCI.

I'm just gonna go pick up from my previous tab.

NCI. We got from the balance sheet of one debt debt, I'm just gonna go pick up from what I did before from the balance sheet.

The debt is 44,522.

If I add this up, it's 35,108 in total.

What I am now trying to work out is I'm trying to derive this enterprise value.

That is what I want to figure out.

But wait a minute, I've got a market value of equity, right? I then know the values from the balance sheet of NCI and of debt without getting too complicated.

And this is where advanced valuation comes into play.

Ideally, we want a market value for NCI, okay debt.

Often bankers use book values.

But if the market value's very different, you might wanna put the market value in there.

I know the value of cash from the balance sheet.

Cash is cash. Let's go pick up our cash value.

And I know the value of the other financial assets.

Again, these other financial assets that you would want, market values, that's going advanced valuation. But for now, let's keep it at book values.

So guys, now I can solve for the enterprise value.

I'm going over the bridge.

I am saying this enterprise value.

I know the value of everything in Coca-Cola is 35,108 because I know the market value of equity I've added on the other funding.

So the value of everything is 350, but I just want the value of the operations.

So I'm gonna subtract cash off that.

I'm gonna subtract financial assets off that.

And then what I'm left with is just the value of Coca-Cola's operations and that is 317,450.

That is Coca-Cola's enterprise value.

And that now gives me a very nice thing to compare with other beverages companies independently of how much debt or equity they have.

I can look or how much financial assets they have.

I just wanna look at the operations of Coca-Cola and compare that to Pepsi, et cetera.

What you will see here is on the left hand side, this is where we have our bridge in Felix.

So if you've ever looked at Felix before this bridge, I just recreated this effectively, we are going to get a slightly different answer to what Felix gets because Felix has taken more advanced things into account, which is is beyond our scope for today. So like pensions, you should take a pension liability into account.

We haven't done that. We're gonna get a slightly different value.

But if we were to check it, equity value of 304, we are going to add all of those funding items.

We are gonna subtract all of the cash and financial assets and we are left with that exact 31 7, 450.

Hopefully everyone is following along.

If you do have any questions though, please ask.

Just take a minute to pause.

Okay? I wanna finish off with talking about multiples now and what multiples are, why we need them.

How we calculate a basic multiple.

So all a multiple is it's a value expressed relative to a value driver.

If I told you I'm looking at two houses, I wanna buy one house costs £2 million, the other one costs £500,000.

You can't tell me, oh, the one's good value because it's £500,000.

Maybe the £500,000. One is a one bedroom.

The 2 million pound one is a three bedroom.

They're different sizes.

So what I want is I want to break it down on a per unit basis.

So I could look at the square feet or square meters and I can say, okay, what is the price of the house per square foot or per square meter? Then I can compare and say, okay, this one, and I'm just making up random numbers, is a hundred per square meter.

The other one is 70 per square meter.

Now it doesn't necessarily mean the one is cheap and the one is expensive, but at least now they're on a per square meter basis.

Now I can say, okay, the one that costs 100 does cost more, but it overlooks a beautiful lake.

The one that costs 70 overlooks a rubbish dump. Okay? The one that costs a hundred has been renovated recently.

The one that costs 70 is quite old.

So at least now I have it on a per unit basis.

Now with a company, you could be saying, well, why can't I just do it on a per share basis? Because that's per something, but it doesn't work that way because the number of shares is random.

You can decide to split your company value up into loads of shares or you could split it up into fewer shares.

So that doesn't quite work.

So what we do is we look at the value per unit of profit effectively, right? What's driving that value? So we've got two types of multiples on a basic level, enterprise value multiples and equity multiples, enterprise value multiples.

I take enterprise value, which is what we just calculated for Coca-Cola, and I divide that by the EBIT.

EBIT is the operating profit of Coca-Cola, and this should make sense.

We said there's gotta be a relationship with the value and the value driver.

Enterprise value is a thousand.

Enterprise value is the value of the operations.

What links up with the operations? Oh, it's the operating profit.

The profit before interest because interest has got nothing to do with my operations interest, has to do with my financing and my investments.

So I look at EV relative to EBIT here, it's a thousand versus 100.

So the multiple is 10 times.

If I wanna look at an equity, multiple equity, I can look in total or break it down to a shape price.

I can't look at ebit, which is operating profit because that's not what equity holders get.

Equity holders first have to make sure interest is paid, if there's any interest income, that also gets added on.

So what's a better value driver for equity is after you look at the financing and investments, that's net income.

Or if you look on a per share basis, earnings per share.

And that gives me a PE ratio, a price to earnings ratio.

So that's 13.3 times.

If we were to calculate this for Coca-Cola, let's go do it.

Let's see how we would calculate the multiples and hopefully we get close to what is in Felix.

Let's calculate Coca-Cola's enterprise value multiple.

So enterprise value multiple for Coca-Cola, I have got Coca-Cola's enterprise value, we work that out over there.

There's the enterprise value. I wanna express that. Enterprise value relative to Coca-Cola's operating profit or EBIT.

Now you see here we don't have EBIT. We've got ebitda.

All that is it's operating profit, but you also add back depreciation and amortization on your assets.

The reason is that is a little bit closer to cash flow, which is what ultimately drives the value of the company.

Also, different companies could have different depreciation policies.

They could also, that could be distorted by M&A activity.

So we often look at EBITDA as a metric.

If we go to Felix for Coca-Cola on the valuation page and scroll down a little bit at the bottom, we've got earnings forecasts from equity research analysts that follow Coca-Cola.

They are forecasting Coca-Cola's earnings.

Generally when we looking at trading comps, which is what we are doing, trading multiples, trading comparables, we look forward to forward earnings.

So if I look for December, 2025, you can see the E means it's expected earnings.

It's 16,353.

That's the expected ebitda.

So 16,353, let's type that in.

And now I can work out Coca-Cola's EV to EBITDA multiple.

EV is 317 billion.

EBITDA is 16 billion.

So that gives me a multiple of 19.4 times Coca-Cola's operations are worth 19.4 times next year's forecast ebitda, that's what CY1 means, calendar year one, December 25.

Let's do the same for pe. I've got the share price.

Share price. There we go. Is 70.46.

So what I need is I need the forecast earnings per share of Coca-Cola.

Very bottom line of the income statement, what belongs to shareholders.

Let's go get that from Felix.

At the bottom it's 3.04.

3.04 is the forecast earnings per share.

So to work out the price earnings, multiple pe, I'm gonna take the share price of 70.46 and divide that by the earnings per share of 3.04.

And I'm gonna get 23.2.

So Coca-Cola's share price is 23.2 times its earnings.

Let's see if that is what Felix has got. We're probably gonna be a little off on some of on the um, multiples because we haven't taken like pensions into account. But let's see. So we got 19.4 and 23.2.

Okay, so there we go. EV to EBITDA multiple 19.5 and 23.1 over there.

Okay, so that's what we've got.

Let's finish off the session by just talking about how this could be useful.

First of all, what I could do is I could compare Coca-Cola with its peers.

So Pepsi, Keurig, Dr. Pepper Monster.

You can see your comps might look a bit different to mine.

I was doing something earlier and I just picked these comps in your comps builder.

You can pick whatever comps you want.

So don't worry if yours looks a bit different.

I can compare and I can say, okay, Coca-Cola is trading at 19.5 times into um, ebitda.

Pepsi is only trading at 13.1 time.

Now this doesn't necessarily mean, oh, Pepsi is undervalued.

There could be a reason for that, right? And so this is where we need to do a little bit more of analysis of what is driving the multiples.

Okay? Um, Andrew, I've seen your question come through.

If you don't mind, I will get back to it in a minute if that's okay. Hopefully you can stick around till the end, okay? But otherwise please do email after I'm sure there's a link or um, you can ask an instructor, please do send an email and we'll definitely get back to you, okay? But I'll deal with that right at the end.

Um, so here what I just wanna quickly show you is why is enterprise value so useful compared to pe? And this I'm gonna do relatively quickly on my sheet EV versus equity multiples. So this is probably gonna be a bit speedy.

All I've done here is I've got two different scenarios, right? Scenario A, I've got a company that's got an enterprise value of a thousand.

They've got lots of cash, they've got no debt, okay? So you can see their equity value's really high because everything in the business just belongs to their equity holders. There's no debt holders.

If I look at company B company, they've got exactly the same enterprise value.

Their operations are worth the same, but they've got loads of debt.

And so their equity value very low because they've got lots of debt.

If I look at their income statements, their value drivers, if I were to work out an EV EBIT multiple for the first company that's a multiple of 10 times multiple for the second company is exactly the same operationally, these two businesses are exactly the same.

If I were to look at the PE ratios, PE ratio of company one is 18 divided by 0.8, which is 23.8 times very high PE company B share price of 2 and EPS of 0.4, they have got a very low PE ratio, right? So PE of 4.8 versus a PE of 23.8 guys, I can't look at that and say, oh, this company at 4.8 is so cheap we need to buy it.

The reason it's got a lower PE is because it's got more debt.

That doesn't mean the company's undervalued, it doesn't mean it's cheap.

It's because these two companies are financed differently.

So they're actually not comparable on an equity basis.

If I really wanna compare the companies, I've gotta look at their operations and if you think about it, if I say in a merger acquisition scenario were to buy a company out, I could change the way it's financed.

What I'm interested in is how good are the operations? How do the operations compare? And then finally what I could also do is imagine I'm trying to value an unlisted business.

Red Bull comes to me, red Bull private company.

They say, okay, we think we wanna do an IPO.

What's our share price gonna be? What should we list at? I can say, okay, let's go have a look at companies that are similar to you and see where they are trading.

If I look on a PE basis, I've gotta be very careful because you could be financed differently.

So we might look at PEs as well, but I'll probably pace place more reliance on enterprise value multiples and then go over the bridge because then I can take your financing into account and then I can go and have a look at your comps. If you hear about people talking about comps, so say for Red Bull, Coca-Cola could be a comp, maybe Monster is a brilliant comp.

And I can say, okay, monster is trading at 21.8 times, its EBITDA.

We think you should be valued around the same.

So if you EBITDA is 1,000, you should be valued enterprise value-wise at a thousand times 21.8.

Final word I wanna say on this is guys, you might not be valued at exactly 21.8, right? Companies have different multiples for different reasons and this goes into what drives value, what drives multiples.

If I look at Coca-Cola versus Pepsi, Coca-Cola has a higher EV EBITDA multiple than Pepsi.

Why might I think this is? Have a look at the profit margins.

Coca-Cola is more profitable than Pepsi.

For every dollar they sell, they generate more in profit.

So Coca-Cola is more profitable.

Also, look at Coca-Cola's growth rates.

Coca-Cola over the next two years, annual growth is 4.5% versus Pepsi's 1.7.

So that is why Coca-Cola is valued higher.

Now this is not saying, oh, Pepsi's an awfully run business guys. Pepsi actually has quite a big snacks business.

That's why they have lower profit margins, right? But this is just explaining, just because you similar kind of companies doesn't mean you're all gonna trade on the same multiples. And this is where multiple analysis comes into play.

Okay, so guys, I've got three minutes left.

Andrew, I haven't forgotten about your question.

I just wanna wrap things up quickly. Hopefully you found this useful.

If you are interested, next week's Felix live is a DCF fundamental because if you wanna come up with a value, say for Red Bull, another way of doing it is not to use a comp.

Another way of doing it to say let's do a discounted cash flow for Red Bull and see what the present value of its future cash flows are.

Okay? So that's what you're gonna be talking about next week.

If you are interested in taking what we've done further today under topics, corporate finance, valuation topics, corporate finance, valuation equity to EV bridge, that's basically what we've done.

So you can go watch that playlist if you just want to go again through what we've done, obviously it's different examples, but that's there.

Trading comps.

The next one to the right, if you click in there here you'll find a lot more detail on things like dilution.

You can see there from uh, video seven onwards, we talk about dilution, working out the diluted number of shares.

If you wanted to look at, we talked about non-controlling interest, NCI under corporate finance, that would be under accounting.

So corporate finance, accounting.

And this has got to do with consolidations.

So introduction to full consolidation. Okay? So if you click in there, you'll find what NCI is, et cetera.

Okay? So thanks very much.

I know we are on time with a minute to spare. If you need to drop off, I think I'm just gonna keep the recording going and Andrew, if you do have a couple of minutes I'll answer your question, but I'll keep the recording going in case you need to disappear. Otherwise, thank you very much.

Please, if you have any feedback, any questions, do get in touch.

I think there's a feedback link when you leave the meeting.

But thank you very much and hope to see you again in a future session.

Okay, Andrew, just quickly, let's have a look here.

Paul wrote 21 EV, why do we add the debt and subtract the cash? Let's have a look here. So I think we were on. There we go.

Okay, so for this over here, this EV, okay, remember, enterprise value is the value of the operations only.

I just want the value of the operations.

I don't want the value of financial assets, I don't want the value of cash, I just want the value of operations.

So what I do is if I know the value of equity, I can see the market, the shares are trading at this value, this is the total value of equity.

I can say, okay, let me see, what's the total value of all of the funding in the business? The value of equity is 304.

The other funding my debt and my NCI, if I add all of this together.

So if I add all of that together, the equity plus the other funding, that value is 350,108.1.

That is the same as what we calculated on the right hand side here.

That reflects the value of everything in the company, the operations of the company, and the cash and the financial assets.

Now if I just want the value of the operations on their own, do you agree? I'm gonna have to take that 350 and I'm gonna say okay, I just want the operations.

So let me take the 350 that includes operations and cash and financial investments.

Let me subtract out the cash and the financial investments and I will be left with just the value of the operations.

And that's what we've got the 317, 450.

So Andrew, I dunno if that clarifies.

If not, please feel free to ask another question.

Just while you're thinking Andrew, someone's asked in the pod whether the recording will be shared? Yes, it will. It's normally uploaded to Felix by Monday morning.

So if you have a look where you'll find it, it'll be under your topics, it'll be under Felix live and it'll no longer I'm going to professional skills and careers. It'll be under Felix live and it'll be towards the bottom.

Because the newest ones are towards the bottom. Okay. So it'll be posted there by Monday.

Okay, great, Andrew, glad to see that.

That makes sense and that was helpful. You're welcome.

Thanks everyone. If anyone has any questions, I'll stick around for another minute or so.

Otherwise, I will end the meeting.

Thanks very much and you're welcome.

Thanks for those of you that have given some feedback.

Thanks very much.

You're welcome Andre.