Welcome, thanks for joining.

For those that I haven't met before, my name's Maria Weber.

I'm one of the trainers at Financial Edge and I'm gonna be taking today's session on valuation fundamentals.

You can follow along with me.

I'm gonna be using just a couple of slides, um, to frame things.

But what you need to be able to properly follow along if you want to is the Excel spreadsheet I'm gonna be using.

You can access the spreadsheet through Felix.

If you go to topics and you navigate down to the bottom of the list where it says Felix Live, and you click on that, you'll come up with all the past recordings.

And then if you scroll right down to the bottom, you'll see what's coming soon and we on the bottom left hand side there, that orange block with valuation fundamentals.

And then if you click into that, you will see if you scroll down, bottom right hand side, there's three downloads.

I'm only gonna be using one of those downloads, but I've left the others there because it might be useful for you to have a look through after, um, the session.

So the first two downloads are just separate little exercises on what we're gonna be doing today.

So the one is empty, the other one's got the full solution, and then the one I'm gonna be using is the one that says class next to it.

Please do ask questions as we go either in the chat or in the Q and a pod.

I'll try answer them as we are going or at the end if there's any I don't get to, I'm happy to answer questions at the end.

We've got an hour, I'm not, definitely not gonna take longer than an hour, but we'll see how we go with what we wanna get through.

So it's in the name.

Hey, we are going back to absolute basics.

So please guys, any question, no matter how simple you think it is, that's what we wanna address.

We are gonna be looking at the difference between equity value versus enterprise value.

And I'm gonna be demonstrating that as we go along with an example.

And then we're gonna talk about and calculate some equity and enterprise value multiples.

Before we get going with the exercise, first, let's just think about the contexts that we could be doing a valuation in, right? There's many different contexts.

One could be that a company is private, they're looking to go public, they want an IPO, they wanna know at what price should we list our shares.

Another scenario might be in an acquisition scenario.

So you've got one company wanting to buy another company, take control of that business there. We are gonna be doing the same valuation techniques, but we just have to have some additional considerations.

So if I'm looking at an acquisition scenario where control is being obtained there, we are gonna have to look at a control premium being paid for that control.

But guys, the underlying principles of valuation are the same.

Okay? So focus of today's session is we are looking at a company on a standalone basis.

What is equity value? What is enterprise value? And what are EV and equity multiples and how do we use them? Why do we calculate them and what do we do with them? There's obviously a lot that you can build on top of this and I'll refer you to some playlists you might wanna watch after the session to take what we're doing further.

Okay, welcome to those of you that have just joined.

Any questions, please in the question and answer pod or in the chat? And I'm just gonna post the link again to the materials, but you can find them under topics Felix Live.

Okay, so let's get started with equity value.

First of all, equity value is the value of what belongs to the owners of the business.

In other words, the shareholders.

Now, if you are a publicly listed entity, you will have an observable share price.

So you can calculate the equity value in the market by taking that traded share price and multiplying it by the number of shares that gives you equity value, otherwise known as market cap for that business.

Now, not all companies are listed, so you can't calculate equity value this way. And I'll explain to you how you could derive implied equity value for an unlisted business.

Or you might wanna see, well this is where the company is trading, it's listed, but what do I think the equity value should be, right? And then you do your own calculation of equity value.

But let's start off with this definition number of shares, times share price.

If we move to the Excel spreadsheet I'm gonna be using, which is the one that says class at the bottom of it, or at the end of it, should I rather say I've picked Nike as an example company to use? I think most people should be familiar with Nike.

So we looking at an athleisure company, sportswear shoes, et cetera.

If we go to Nike's balance sheet, I've pre-prepared some of this so it can just make things go a little bit faster.

But I wanna show you how you can do this yourself very quickly and easily.

If we go to Felix and we type in Nike, so if you know the ticker, that's NKE, otherwise if you type in Nike, you'll come up with it.

It's listed on the New York, New York Stock Exchange.

If we click in there, I land on the valuation tab because that's what I've been looking at.

But if we go to the categorized tab, that's where we find all the financial filings, press releases, presentations, et cetera.

I've taken the latest balance sheet, so for the financial year, 2025, I don't need to even click into the 10 K.

We just click on this balance sheet, the bs, and then we get the balance sheet presented to us.

We can see that Nike's financial year end is 31st of May, okay? So this is the balance sheet as at the 31st of May, 2025, and then corresponding data for last year, which we don't need.

If you copy that and paste it into Excel, I then just tidied it up a little.

I deleted some rows, I calculated the subtotals myself just to check, but that's where I got the numbers from.

Okay, so latest balance sheet for Nike.

We will deal with all these different color blocks and talk about what's going on here.

But for those of you that are not familiar with accounting balance sheet, in simple terms, one side of the balance sheet, we've got all of the assets of the business.

So assets are something where a company's gonna get future benefit from those assets.

And then on the other side of the balance sheet, we have got all of the liabilities and equity, those liabilities and equity support the assets, right? They effectively funding or financing the assets.

If we look at equity on the balance sheet from row 29 onwards from an accounting perspective, there are different elements to equity.

I'm not gonna go through each of these things in detail, but I'll refer you at the end to a playlist on capital structure where we do talk through the different elements of equity.

But you can see here at a high level, we've got common stock at par value kind of token stated value.

We've got another account, which is the additional paid in capital.

So when you issue shares, Nike doesn't issue shares at par, they issue shares at above par.

Okay? So that's the difference.

We've then got the retained earnings and OCI.

Okay, someone's just asking for the spreadsheet.

I dunno if you have access to the chat.

Um, if you've got access to the chat, you should be able to access that link.

If I just quickly copy this in there, if you don't have access to the chat, I can actually type the answer here.

There we go. So hopefully you now have a link to where you can find the materials and that's the class spreadsheet.

Great. Okay, so if we just add up these elements of equity, I'm just going to the top here to row nine.

If I just go add up equity on Nike's balance sheet, it's all of those components.

I do have the total there, the 13 2 1 3, but I just wanna be very clear in terms of what's gone in to that total.

So we have an equity value for Nike, but guys, this is not Nike's equity value because this is the book value of equity.

Whenever I'm dealing with a balance sheet eight, I'm talking about book values, it's the recorded values in the books.

Nike's equity on the balance sheet captures what Nike has issued shares for in the past.

It captures any earnings that have built up that have not been paid out to shareholders as dividends. And a few other things. If I wanna buy a Nike share, I'm not buying what Nike has done in the past, I'm buying the future, right? What am I gonna earn by becoming a shareholder of this business going forward? And that is what the share price captures, right? So this book value of equity is not the same as the market value of equity.

Let's go and have a look.

Nike is a listed company, so they do have a share price.

So I can calculate the current market value of that equity.

I'm gonna now move on to the next tab, which is the Nike valuation tab.

Okay? And I'm just pasting the link one more time in the chat for people who might have joined since I posted it to find the spreadsheet, we need to go and find Nike's share price.

So let's go back to Felix.

And if I close down that balance sheet that I had for Nike and I go to the valuation tab.

On the valuation tab, we can see, there we go.

Nike share price, $77.92.

Also in the top left of the screen, underneath Nike's next to Nike's ticker, we've got the share price and we can see that's the closing share price from yesterday.

So Nike's trading the share price will be changing, but we're gonna take the close as of yesterday, a static share price.

Now let's put that in. So 77.92, that's the value of one Nike share.

Okay? And I would just note that this is from Felix, right? And it is from the 28th of August, 2025.

Okay? Or us, you'd obviously put the August 1st. Okay? But the important thing is we know where I got that price and what the date was.

The next thing we need is number of shares.

So I've got a share price, I need number of shares.

Now this is where things start getting a bit more complicated.

We are here to do the fundamentals, but I will give a high level explanation and then refer you to a playlist where you can learn about this in more detail.

If we look on Felix, I can see this shares outstanding.

Those are the number of shares that you can think of as actually existing, right? Actually being owned by shareholders at the moment. Okay? So I'm using very simple terms here, but you can think of that as like the actual number of share shares.

If you click into that, you can see it comes from the front page of their latest filing, and you can see they've got class A and class B shares, and that was as of the 9th of July.

So even though Nike's year end goes to 31st of May, when they file their 10 K, they do it after the 31st of May, and on the day they file it, they give an up to date number of shares outstanding.

Now we have to recognize that there's things in existence that could become Nike shares in future, and those things would be employee stock options that Nike has given their employees, where employees have got a right to buy shares in future at a certain price, and it's part of senior employees pay package right? Now, in a nutshell, those kinds of instruments cause dilution because if their employees do exercise their options, they get to buy shares at say, and actually we can see, there we go, the strike price, okay? So in this case, in this case, they out the money 'cause the strike is actually above the current share price.

But say employees had the option to buy shares at $60, they would be buying shares basically at a discount that causes dilution and investors take that into account.

So this share price of 77.92 already reflects potential dilution.

So what I wanna work with is I wanna work with the diluted number of shares.

So you can see in this Felix Bridge, we've taken the shares outstanding.

We add a dilution adjustment to that.

I'll show you a playlist at the end where you can find the calculation for the dilution adjustment.

Bottom line is we wanna use this number of shares, the diluted shares outstanding.

So that's 1 4 8, 7 0.6.

So please, any questions as we go, please don't be shy to ask.

Now I can work out Nike's equity value.

I take price of one share diluted number of shares outstanding, and I get 1 1 5 9 1 3 0.8.

Let's just sense check ourselves back to Felix and see that we've got a similar number.

It might be slightly different because of rounding, but I can see, what do I have? 1, 1, 5, 9, 1 4.

Okay, 0.1. And I've got 1 1 5 9, 1 3 0.8.

So we want 0.3. My maths is terrible, but 0.3 difference. That's a small rounding difference. Okay? So that is the equity value.

I'll come back to this colorful blocks when we are doing enterprise value in a moment, but let's go put that equity value in so long.

Can you see the difference here? Right? Book value of equity on our previous tab was, what's that? 13 billion? If I look here, that's 115 versus the 13, actually 116 versus 13.

Okay? So that is equity value.

That's where Nike is trading at the moment.

Okay? Any questions please do ask.

Okay? If that is equity value, let's now move on to enterprise value.

I've got a basic slide that is a little bit too simple for a company, but it illustrates the idea of why we like enterprise value very well.

If we look at a house right on the left hand side, we've got the value of that house and this asset value, I'm gonna call enterprise value.

That house is $500,000.

If I look on the right hand side of the diagram, we've gotta finance the purchase of this house.

I'm gonna put in my own money.

So what belongs to the owners of the business? Okay, I put in 200,000 and that means that I need to take out for 300,000.

Now, the reason we like to look at enterprise value as opposed to equity value.

When I'm comparing companies, when I'm using one, a set of I'm trying to value a company and I'm using comparable information from comparable companies, enterprise value is nice because it's not affected by the way the company is financed.

Whereas equity value is, imagine I can only get a mortgage for 100, right? Do you agree with me? That then means equity value is gonna be 400 if I wanna finance the purchase of that house.

If we look at it from another perspective, right? Imagine I now sell this house for 500.

If I have paid off some of my mortgage and now I only owe 200 on the mortgage, that means well I sell it for 500.

I only have to pay the bank back 200.

So my equity value is 300.

Can you see how equity value is changing as the financing is changing? So if I wanna compare two companies and they financed differently, it's not good to use equity value or equity-based multiples.

It's better to use enterprise-based multiples, enterprise value multiples because I cut through the financing, right? I will take the company's financing into account, I'm not ignoring it.

I will go over the bridge and take that financing into account, but I start my analysis with the operations of the business.

And that brings us on to the next illustration, which is applying this to a company.

So it's not as simple as saying asset value for a company.

Think about it. For Nike to run their operations, that's what enterprise value is.

It's the value of the operations of Nike.

They don't just have operating assets.

Yes, they're gonna have receivables, inventory, property, plant and equipment, but with running a business comes operating liabilities as well.

We are gonna have payables to our suppliers, taxes payable, so those operational liabilities too.

So we have got value of the operating business as being the enterprise value.

Then we recognize there are other assets potentially in the business like cash, financial assets, and then everything on the left hand side of the diagram effectively belongs to people.

On the right hand side of the diagram, you can think of it like that.

So if I want to work out what equity value is, I can say, okay, I've got enterprise value.

Let me add the cash and other assets on.

I then say that's the total value that belongs to everyone.

Let me take off what belongs to the debt holders and that then will give me equity value.

And guys, that is the bridge of going from equity enterprise value to equity value.

If we did it the other way around, which is what we are gonna be doing for Nike, I'm trying to figure out this enterprise value.

So I've got the equity value that I've just calculated from looking at the share price and the diluted number of shares outstanding.

I then say, okay, let me add on the other financing in the business.

That's the total value of everything in Nike, the operations and anything that falls outside the operations.

I just want the value of the operations.

So let me take off the cash and other financial assets.

So from this, this is the bridge.

Yes, it gets more complicated than this and I'll show you an example of a company right at the end where it is more complicated.

But for you to be able to go over the bridge fundamentally, you need to understand what is captured by the enterprise value.

And that is what I want to go through with you back to our spreadsheet.

I'm gonna go back to the Nike balance sheet.

We'll come back to our valuation in a moment, but let's go back to our balance sheet and let's go through every item in Nike's balance sheet and classify it according to the categories that I've got on the right hand side here.

Okay? So as it's on the left hand side, all liabilities and equity on the right hand side.

But I wanna split out the operating assets and operating liabilities from the financial assets and liabilities.

First one we start off with is cash, guys.

Cash falls outside enterprise value.

Yes, you could say Nike needs some cash to run its business, but cash is a function of Nike's operations.

It's also affected by other things.

Like if Nike's just taken out a big loan, they're gonna have cash in the bank.

If they pay dividends, they're gonna have less cash versus if they don't pay dividends, they may be gonna have a higher cash balance.

So cash is actually a financial item.

It's outside of the operations as we highlighting.

Let's go put this into our diagram.

So the numbers all tie up.

Okay, so cash, there's my highlight.

Then I've got short term investments.

In order to be an athleisure company, Nike does not need to have short term investments. Imagine I'm now trying to value another business.

I've got an unlisted company for example, and they do a similar thing to Nike.

They not listed. I wanna say, well, what should they be valued at? Okay, let me see what Nike's valued at guys.

To be an athleisure business, you don't need short-term investments.

Nike's got some excess cash.

They've bought maybe some government bonds to earn a bit of extra return on that cash.

That's not part of their operations, it's not part of what they do.

That's a financial decision.

So that falls outside of operations.

And we could have long-term, short-term, so current, non-current, they could have investments in other businesses where they're planning on holding them for a long time. That would be under the non-current section, okay? But investments are not part of operations.

Now we get onto the operating items to run my business, I'm gonna have accounts receivable. When I sell to the stores that are gonna sell my shoes and my clothes, I give them credits.

Okay? Accounts receivable, inventory, my stock, prepaid expenses.

Maybe I pay my rent in advance, okay? Those are all part of my operations.

If we then move to the non-current side of things, so non-current just means we expect to get the benefit after 12 months from balance sheet date, whereas current, we expect to get the benefit within 12 months.

If I look at these assets, property, plant and equipment, okay? The buildings, machinery, leased, property, plant and equipment.

Now leases is a more complex area.

You might be aware that treatment for leases under us, accounting standards, US gap is a bit different to international financial reporting standards.

Again, I've got a playlist that takes you through how to deal with leases.

For now, let's keep these operating leases as part of the operations, okay? You could treat them as financing, but that's a more complex adjustment, okay? So I'm gonna keep those as part of operations.

I've then got intangible assets.

So imagine trademark or patent or something that Nike's got goodwill from acquiring other businesses and then deferred taxes, other assets.

So effectively you can think of this deferred taxes.

Nike has overpaid tax.

So in future they're gonna pay less tax, okay? Very simply put, but bottom line is those are all part of the operating assets of Nike.

So let's go add all of those up, okay? And then we wanna make sure that the left hand side of our balance sheet, all of those assets, it does agree with the total assets. So we haven't skipped anything.

If we move on to the liabilities and equity side, we're gonna do exactly the same thing.

The first two items, current portion of long-term debt and notes payable, those are financial items.

If I wanna run an athleisure business, I don't necessarily have to take on debt.

I could finance my business just with equity.

This is a financial decision separate from the operations.

So the notes payable, it's like an IOU.

Nike says, gimme a hundred dollars now I'll pay you back a hundred dollars plus interest in a year from now.

Okay? That's a financial item and that is debt.

Then we get our operating items, accounts payable.

Nike owes their suppliers who they buy raw materials from operating leases, okay? We said we're gonna leave as operating for now.

Accrued liabilities, Nike owes money, save for electricity in their buildings, income taxes, those are all parts of running the business.

If we move on to the non-current side, so stuff, liabilities that we expect to settle after 12 months from balance, sheet date, long-term debt that is in the name, it is debt.

This is not part of operations.

Nike has taken out a loan or Nike have issued bonds to bond investors.

We can go look in the financials and see what that is in the notes.

But that is debt, it's not part of operations.

Operating lease liabilities, like I said, the lease side of things, okay? We could separate that out and treat it as debt. We're gonna leave it as part of operations for simplicity.

And then my taxes are also part of operations.

So let's go finish off our balance sheet.

Let's pick up all the debt items, the blue ones.

Hey, I just wanna delete my writing there.

So if we go pick up the current and non-current debt, okay? And then go pick up all of those operating liabilities, we've already picked up the equity items.

If I sum up the total, I've gotta do a check that my balance sheet balances, yes, everything balances.

Any questions, please don't be shy to ask a question you might be thinking is okay, we are doing valuation.

Why on earth are you hopping on about the balance sheet? Guys, it's all about understanding what is captured by enterprise value.

Okay? So that's what we are gonna be doing next.

What we've done up at the top here is I have just split out the balance sheet into the different categories.

I've got all the assets on the left hand side and all the liabilities and equity on the right.

But what I actually wanna do to go back to our diagram is I don't just want the assets on the one side, I want the operating assets and operating liabilities.

So I want the operating assets minus operating liabilities on the left and that's what I'm going to do now.

So I'm gonna take the net operating assets, I'm gonna take the two orange blocks, the operating assets and the operating liabilities and I'm gonna knit them off against each other.

And I'm gonna say as a parcel, the value book value on the balance sheet of Nike's operations is the assets minus the liabilities, and that is 12 0 2 8.

I then go pick up the cash as before.

I'm just gonna go get it from my calculation above.

My other financial assets is exactly the same thing.

I'm gonna go get the debt from above and I'm gonna get the equity from above because the only thing I've done is just netted off the orange blocks.

Let's just check our balance sheet still balances and it does.

So what I've got on the left hand side is I've got the enterprise value, but that is not enterprise value.

That is the book value of Nike's operations.

That is the value of property, plant and equipment.

What did Nike pay for their building or their machinery minus depreciation.

Guys, if I'm gonna be buying into Nike, I don't care what they paid for their property, plant and equipment I care about, what are they gonna do with their property, plant and equipment? What's the value of the operations? Now there are different ways of deriving that.

One way if we go to our Nike valuation tab is if I've got the equity value, I can then just go over the bridge to work out, okay, well then what's the enterprise value? I've got the market value of equity.

Let me just go over the bridge.

Another way would be to directly calculate that operating value.

I could do a discounted cash flow calculation.

I could look at the future cash flows of Nike, discount them back and get an operating market value for Nike.

If you're interested, there was a DCF fundamental session a couple of weeks back, Felix live, you can watch the recording and coming up in two weeks, we've got an advanced DCF, okay? Or you could use multiples of similar listed businesses and use that to come up with an enterprise value.

Okay? So different ways of coming up with this value, the important thing to realize is what it is and then how to go over the bridge from equity to enterprise and vice versa.

I've just seen a question in the chat, but you have answered your own question, which is brilliant, no problem.

If you have any further questions, please make sure to ask.

Okay, so guys, let's finish this off.

Okay, I have got on the right hand side the market value of Nike's equity.

I know what debt is, I know what cash is, I know what other financial assets are.

So I'm just gonna put all those numbers in and work backwards to figure out what is this enterprise value, the net operating assets.

So that is enterprise value.

Now just to show you, you could go to your Nike balance sheet tab and just pull the numbers from there.

But I did just wanna show you if you pull them yourself directly from the financials of Nike being able to navigate in the 10 K.

So if you go back to Felix and you just click into that 10 K and you go to sections.

So the top left hand button, if you click on sections there, you can navigate easily to the balance sheet.

It's pretty small, so I just zoomed in.

If you click on that little plus button on the right hand side, you can zoom in.

This is Nike's balance sheet. So this is exactly what I had copied.

I just wanna show you seeing it as an actual balance sheet in the 10 K.

Let's go pull all the numbers that we need.

We said we wanna find the debt numbers, right? Current portion of long-term debt notes payable and long-term debt.

You know in Felix it's super easy to copy stuff.

Um, I'm just gonna type in zero for current portion of long-term debt because we have that as nothing notes payable.

You can just double click on the number, right? If you double click on the number, you should see save come up.

I've already saved it, that's why it's asking me to copy the link.

But if you save that annotation, you can come here and just past it in it pastes the number and a link so you can find very easily where you got your numbers from.

Let's do that for long-term debt as well.

Under non-current liabilities, there's my long-term debt, 7, 9, 6 1.

I've already copied it, so I'm just gonna copy the link.

But if you double click save, you can come here, paste that into long-term debt.

And then if we look at the asset side of the balance sheet, there's our cash and short-term investments.

So cash of 7, 4, 6, 4, double click, save and then paste.

And then we do exactly the same for the short term investments.

And that would be any financial asset.

It doesn't have to be short term.

It could be Nike owning a minority stake in another manufacturer, okay? It could be non-current.

The point is it's outside of Nike's operations, okay? So we just went and pulled those numbers, but they are exactly the same as what we had before for our individual items.

So let's go put them in cash.

We've got the 7, 4, 6 4.

So I'm just linking here to my diagram.

Other financial assets, any kind of investment that's not operational, current, non-current EV the orange block, that's what we're gonna figure out.

And then debt, I'm just gonna add together the debt items and we should get back to exactly what we had on the previous tab.

The 7, 9, 6, 6.

So now on the right hand side, the total value of all of the funding in the business, the debt plus the equity Is 1, 2, 3, 8, 7, 9.

That total funding represents the value of everything in Nike, the operations, and any cash and other financial assets.

So if I know hash is 7, 4, 6, 4 of that value cash is representing 7, 4, 6, 4 of it, other financial assets is 1, 6, 8, 7.

I can then say, okay, well if I just want the the value of the operations, let me take that total, subtract the cash, subtract the other financial assets and I get 1 1 4 7 2 8.

If I total it up just to check yes, my balance sheet balances as a final sense check.

Let's check this to Felix.

We might be slightly out because we have got a 0.3 decimal difference I think from rounding, but let's just go see 1, 2, 3, uh, not 1, 2, 3.

I wanna check the 1, 1 4 7 2 8.

So this is now enterprise value.

So 1 1, 4, 7, 2, 8.

If we go back to Felix and go back to the valuation, there we go.

1, 1, 4, 7, 2 9 0.1 and we at 1 1 4 7 2 8 0.8.

So we've got that small little rounding difference.

Okay, so guys to sum up, I'll just do the calculation again one more time. At the bottom here I have got the equity value of Nike from looking at its observable share price because it's a listed business.

I then I'm gonna say, okay, what else goes on that right hand side funding part of the business? Because all of that funding is invested in the assets and operations of Nike.

So I now add together all of the other funding and then I say, okay, but I just want the value of the operations.

So let me take out the value of any other assets that fall outside of operations and that gives me my enterprise value.

So exactly the same as what we've calculated.

Now how are we going to use this? I want to value another business.

And I've identified, okay, the company I'm trying to value is an athleisure company.

It does very similar things to Nike and I would identify a few peer companies, right? So maybe I'm gonna look at Nike, I'm gonna look at Lululemon, I'm gonna look at Adidas, I'll look at a few different companies.

But the problem is I can't just compare the values of those companies.

It's like saying I've got two houses.

One house costs $500,000, the other house costs $2 million.

Okay? First of all, I have to be sure that I'm at least looking in the same area, right? One's not in a very premium area versus another one that's in a more rundown part of town.

I'm looking at least in the same area.

So relating that to company comparables and peer groups, I'm looking in the same industry, they should do the same thing, right? Then I need to get it on a per unit basis.

The one house might cost $2 million 'cause it's a six bedroom house.

The 500,001 could be a studio apartment.

So for a house I would get it on a per square foot or per square meter basis.

So you could say, okay, but then for companies, why don't I just do it on a per share basis? Problem is that's random, right? One company could have loads of shares, another company could have a few shares.

So that way of splitting it doesn't make sense.

So the way that we split it is by looking at a income statement, figure a profit, figure a value driver, all a multiple is a multiple is how many times bigger is one value versus another value.

So I wanna get a value of the company per square foot, I'm gonna get a value of the company per dollar of profit.

Now we've just gotta make sure that we are matching the value with the value driver.

And there's more multiples you could calculate here, but we've put two multiples enterprise value to EBIT and price to earnings.

So enterprise value we've just been going on about is the value of the operations of the business.

If I think of an income statement, what's related to operations? Well that's gonna be my earnings before interest and taxes.

That's gonna be my operating profit before interest, right? Because I don't wanna care about how the business is financed.

I don't wanna look at interest income, interest expense, I don't care.

So I say enterprise value's a thousand EBIT is a hundred.

So enterprise value is 10 times the EBIT.

So if I'm now trying to value my company, my company that I'm looking at this unlisted company, I say it's very similar to this business.

If this business's enterprise value is 10 times, its EBIT.

What's my company's EBIT? Okay, my company's EBIT is 200.

If my company's EBIT is 200 and similar businesses are trading at 10 times EBIT, I should be trading at 2000 enterprise value.

If we then look at another multiple, which is an equity multiple, we've got the share price, right? So equity there, we are going over the bridge in the other direction. This time I've got enterprise value.

Say I've done a D, C, F or I've derived that by using multiples, I then say, okay, what else is in this business? There's cash sitting there, let me add that on.

And then I want just what belongs to the equity holders? So let me take off the debt and then I've got equity.

So I've got equity on a per share basis and I then think, okay, well in an income statement what links best with equity? And that's gonna be the bottom line of your income statement, net income, because that is what belongs to shareholders.

That's after interest.

So I'm gonna match the equity with the net income on a per share basis that's looking at share price relative to earnings per share.

And we see here that's 13.3 times, let's go calculate the multiples for Nike.

Going back to our sheet, I've got equity value and actually I've got the share price, right? That links with equity value.

If I look on a per share basis, and guys if you're wondering, I don't wanna get derailed, but people often ask me, how am I doing these colors so quickly and revealing my formula So quickly if you're not aware, um, there is a Felix plugin, financial edge FE max.

If you go to your Felix homepage, there's an Excel productivity add in.

So you can have a look at that.

Um, and it gives you lots of useful shortcuts. Okay? But anyway, let's go back to Nike.

So going back to Nike, I've got the share price, I've got the enterprise value, I need earnings numbers.

If you scroll down to the bottom here, you can see I have got different um, metrics, revenue ebitda.

So EBITDA is earnings before interest in taxes, which is operating profit plus I add back depreciation and amortization.

That's useful because DNA can vary quite a bit between companies depending on policies, depending on previous m and a activity.

So EBITDA is quite a common one to look at.

Now we've got historical numbers.

So the actual may 20, 25 year end numbers, I've also got last 12 month numbers, which in this case is the same as the may year end because we don't have any more UpToDate information than that.

Now if you look at something like credit, if I wanna look at say what a company can borrow and I think they could borrow say two and a half times their ebitda.

Typically there we look at last 12 months more conservative to see what the company has achieved.

When I'm doing valuation, it tends to be forward-looking.

We buying the future of the business.

So I'm gonna rather look at these projections.

May 26, may 27, may 28, I'm just gonna do it for May 26.

What we've got here is equity research analysts, they follow Nike, they look at management guidance, they do their own research and they forecast what they think numbers are gonna be in future.

And this is consensus. So this is like the average.

So we can see Nike, I mean we're not analyzing their performance, but they are having a bit of a tough time.

I know they're undergoing turnaround bit of a change in strategy.

Um, they try to move away, say from wholesalers. Now they're going back. So you can see they're actually predicting a dip in their revenue, okay? Dip in their earnings. But let's ignore that.

Let's just go pick up the earnings numbers.

So I'm gonna pick up this May, 2026, the 3 6 1 4 EBITDA number.

I can copy that and then I'm going to paste that here.

I'm just gonna paste it as text so it gets formatted nicely.

You could just type the number in and then let's go pick up the earnings per share for 2026 forecast.

And we see at the bottom of the screen that's 1.66.

So 1.66 there is the forecast earnings per share to work out the multiples for Nike.

Nike, I say right? Enterprise value is 1 1 4 7 2 8 relative to the 2026 forecast ebitda.

And that's why you see here it says FY one.

So the next forecast financial year, that gives me a multiple of 31.7 times.

And if I look at a price to earnings multiple, the share price of Nike is 77.92.

If I look at what next year's earnings per share is forecast to be, that's the 1.66.

And so they are trading on 46.9 times multiple.

Now, purpose of today's session is not to analyze multiples, but guys that feels very high, right? But it is because Nike's earnings are maybe temporarily low low, okay? So if I were analyzing Nike, I don't think I'd be relying on next year's numbers in terms of working out my multiples.

I'd probably look out further than that because we know they're undergoing a bit of a turnaround, okay? But that is a whole nother area of analyzing multiples.

Guys, any questions, please don't be shy to ask.

I just quickly wanna check my chat and q and a pod, I've got two more things I wanna end off with.

So we've done it right, we've worked out Nike's multiples.

Now first of all, it can get more complicated than this.

So let's go to another company.

If I pick Coca-Cola, so if you go top right hand corner, if you just type in ko, which is Coca-Cola's ticker, you can type in Coca-Cola as a name. But I think there's a couple of listed entities.

So let's get the right one, which is Koko looking in their bridge, you can see it starts off the same as what we did, right? Coke's share price, their diluted shares outstanding and then we've got their market cap. There we go. That's their equity value.

But then we have got more items in the bridge.

So this is where it's getting a bit more complicated. Things like non-controlling interests, pension liabilities you could have to take into account.

We've also got not just the short term financial assets.

Coca-Cola has got quite a few investments in other beverages companies for example, they own about 20% of Monster.

So we've got that incorporated that's outside of their operations, that's an investment that they don't control.

So you can see more complicated items in the bridge.

What we also see if you scroll down is we've got here a comps builder.

So I'm just gonna reset in case I've changed this, but you can pick different companies to go in here. So let's imagine, okay, we trying to value Red Bull.

Where does what we've done today fit in? Okay, I'm trying to value Red Bull, I am gonna pick other similar beverages companies.

Okay? So here's a list of beverages companies.

I could go pick more, adjust my comp builder, but then what I wanna do is I'm not just gonna rely on these multiples.

Can you see Felix has already calculated multiples for me. They've calculated a pe, they've calculated an EV EBITDA number, okay? I don't just wanna rely on these, I wanna calculate the multiples myself and that is exactly what we just did for Nike, right? Listed business, I can calculate their equity value.

I go over the bridge, I calculate their enterprise value and then I calculate their multiples.

Then what I have to do is I have to look at this list of companies I've got and I've gotta now start thinking about what drives valuation and what drives these multiples.

If we go back to our house example, one house might, if I put it on a per square foot basis now, so I've eliminated the size difference, I've got it per square foot.

One house might cost more because it's recently been refurbished, it's got better fittings, right? It should cost more.

It doesn't mean it's expensive, it should cost more, right? So what I've gotta think about is, okay, well what is driving valuations? Think about what would you be willing to pay more for a company that's growing faster? Growth drives future cash flows.

Ultimately the value of a company is the present value of the future cash flows.

So companies that are growing faster will have how should in the absence of all else being equal higher valuations.

I've also gotta think about returns.

What returns is the company making? So what's the profit margins like? More profit margins means more cash flows in future.

I've also gotta think about their capital intensity, right? If they don't need a lot of property plants and equipment, they don't need a lot of working capital, they're gonna make high returns on their capital.

And then I also have to think about risk, right? If companies growing super fast, that's one thing, but it could be quite risky.

So I've also gotta think about risk.

A company that is more predictable, more stable, that's got a very defensive position, they can withstand dips in the economy.

That is a more stable company that I'd be willing to pay a but more for.

So what I have to do is it's not just about saying, okay, these are all beverages companies.

I'm trying to value Red Bull, I'm gonna take the average of these, or I'm gonna take the minimum and the maximum.

I've gotta look at Red Bull's characteristics and think about what Red Bull is probably most similar to.

What is Red Bull's growth? Like what's Red Bull's returns like? And then I narrow down the list into a short list of companies that I can then get a close valuation for Red Bull.

And guys, you can see here, um, if I look, so we saying higher growth, higher returns, if I just take that 19.3 for Coca-Cola, their enterprise values 19.3 times calendar year one.

So if I'm comparing lots of different companies, I don't wanna use the financial year end one's in May, one's in September, you put it to a common date on Felix we use calendar years.

So December, if I look at Coca-Cola enterprise value, 19.3 times December, 2020 five's earnings Pepsi is only 13.6.

Now does that mean Pepsi's undervalued Coca-Cola's overvalued? Not necessarily because look at Coca-Cola's growth rates, Coca-Cola's two year growth rate is forecast to be 4.5%, whereas Pepsi's is lower.

Look at Coca-Cola's margins.

Coca-Cola's got much higher profit margins than Pepsi.

Doesn't mean Pepsi's a bad company, it's just different because Pepsi's got a big snacks business snacks, lower margin business than drinks.

Okay? So to really understand valuation and multiples, you've gotta understand the businesses you're looking at what drives those valuations and that then helps you value another company.

Okay? Last thing I wanna do is just show you on this final tab, yes you do look at PE multiples. Investors are interested in PE multiples, but we've said you've just gotta use them with caution because if companies are financed differently, they will have different equity values and they will have different PE multiples.

So just to illustrate, we've got two scenarios or two companies.

One company we've got their enterprise value and you can see they've got a lot of cash.

So assets on the left hand side of our bridge and they've got no debt whatsoever.

As you might imagine. They've got a high equity value, right? So enterprise value plus the cash, no debt.

So equity value is very high on their income statement.

We can also see that they've got interest income, but they've got no interest expense because they've got no debt.

So we work our way down and we get an earnings per share.

Company B, they have got no cash, but they've got a lot of debt and as you might expect, they've got a lower equity value.

If we look at their income statement, they don't have interest income, but they've got a big interest expense and that filters its way through into the earnings per share.

Now if I look at the enterprise value multiples for company a enterprise value of a thousand relative to EBIT of a hundred, that gives me a 10 times multiple.

If I do the same for company B, enterprise value relative to earnings, exactly the same operationally, these two companies are valued equally.

If I go down to the price to earnings level share price is 18, earnings per share is 0.8, I've got a 23.8 times multiple and if I copy that down for company B, I've got a 4.8 times multiple.

Now guys, you can imagine if I am trying to value another business, which one of these is a good comparison, the 23.8 or the 4.8, it's gonna depend on how my company's finance, right? So to cut through all of that I can just look at the enterprise value level and then go over the bridge.

Also, if I'm just looking at a list of PEs, I could say, oh wow, company A looks expensive, or Company B looks cheap because it's got a low PE that not necessarily company B's got a low PE because it's got a lot of debt doesn't mean the company's cheap.

It just means that what belongs to equity holders is less because there's a lot of debt financing the business.

Okay? So this is just showing you the value of looking at enterprise value multiples. And yes, we do calculate and look at PE multiples too, but you just have to exercise caution because PE is gonna be impacted by capital structure.

That brings us to the end of the session for today.

We've got three minutes to go, but I'm proud of myself for saying what I wanted to say within the time actually that waffling, and I'm gonna forget to show you next steps if you wanna take this further.

So loads of stuff that you can discover on Felix, if you wanna have a look. First of all under topics, if you go under investment banking to accounting under accounting, the stuff that I was talking about with different elements of equity, so like what's additional paid in capital, you'll find that stuff under capital structure.

Okay? So accounting, capital structure, more valuation stuff is under investment banking valuation.

What we've just done is this valuation fundamentals.

You've got DCF fundamentals, but there's a Felix live recording from a couple of weeks back, which is great.

Go have a look at the Felix live as well as an alternative EV to equity bridge goes into more detail on what we've done.

And then here guys trading comparables, that one goes into more detail.

If you scroll a little bit down to video number seven, that's where we start calculating diluted number of shares.

Okay? So calculating that dilution and then also if you are interested in, um, this is not getting advanced right into all the nuances, but we do have leases.

I mentioned leases are different between US GAP and IFRS. So also under um, valuation leases.

And then do join Felix live. I think it's in two weeks. There's advanced DCF, but make sure you look at your basic DCF fundamentals first.

Okay? I am going to stop talking.

Thank you very much for joining.

I do hope to see you on future sessions.

I'll stick around now for a couple of minutes if anyone does have any questions, but otherwise, thanks very much and enjoy the rest of your day and your weekend.

Thanks guys. You're welcome everyone. Thanks a lot.