So we are gonna be talking about valuation fundamentals.

My name's Maria Weber, I'm one of the trainers at Financial Edge and I'm gonna be doing today's session.

So materials that I'm gonna be using, I've got a couple of slides just to guide us through some of the ideas.

But what I've uploaded for you to follow along with me is an Excel spreadsheet that I'm gonna be using.

You can find it at the link in the chat, but I know sometimes the chat might not work for you depending on security settings.

So you can navigate to this yourself if you just go to Felix and then you've gotta go under topics.

And under topics, go to Felix Live.

Okay, so topics Felix live.

If you click on Felix Live, you'll come onto this page with all the different tiles of all of the past sessions.

So today's session is being recorded and it will be uploaded.

I think it normally takes a few hours or days, but normally by Monday it's there.

Um, so if you navigate to topics Felix live, you'll see all the past recordings where this recording will appear probably on Monday, but you just need to scroll down until you come to these orange blocks.

Valuation fundamentals coming soon. That's today's session.

If you click on that, you will find the downloads.

If you just scroll a little bit further down h you'll see there are three files here.

So we've got a workout empty, a workout empty class, and a workout full.

The workout empty and workout full files.

Those are individual little exercises on separate concepts.

What I thought might be a bit more fun for our session is to take a real company and to calculate equity value and enterprise value for a real company.

So that's what I've done in the class workout file.

Okay, so class workouts to follow along with me.

That middle one there that says class.

Okay, so today's session is valuation fundamentals and we are really gonna be focusing on the absolute basics.

Obviously there are a lot of complications that we can then build on, but the purpose of today is the foundation.

Okay? So please no question is ever too simple, but especially when we are going back to absolute basics, please do ask questions.

Now we are going to start by talking about what equity value is, what enterprise value is with calculations for both.

And then we are going to introduce enterprise value and equity multiples.

Let's start by just thinking about why we might wanna value a company.

Okay? There are a lot of different scenarios.

One scenario could be that we've got a private company and they thinking about going public.

They want a list. We need to know, okay, well at what value should those shares be listed on the stock exchange? That's one scenario.

Another scenario is we could have an already listed business and we wanna assess whether we think that value that those shares are trading at is actually accurate.

Do we agree with that valuation? That's what equity research analysts do, right? Equity research analysts follow companies and they'll come up with what they think the value of the stock should be and then they give their recommendations.

Is this a buy, a sell, a hold? We could be looking at buying the whole company.

So a merger or acquisition transaction, we could be looking at doing a leveraged buyout.

So a PE fund adding lots of debt onto the company.

So lots of different scenarios.

The fundamental concepts however, remain the same equity value versus enterprise value and what your multiples are.

But then obviously there are gonna be nuances and complications that you then going to add on.

So for example, if you are looking at doing m and a, so something that's top of mind is the Netflix Paramount Warner Brothers transaction that was happening.

I saw in the news this morning that it now looks like Paramount is gonna be buying Warner Brothers, not Netflix.

Um, there you are not gonna just be offering the value of the shares on a standalone basis for Warner Brothers. You've gotta offer a control premium because you're buying the whole company.

Okay? So the point of what I'm saying here is just to say yes, valuations that are nuances to it, but we here just sticking with the absolute basics, enterprise value, equity value and a multiple because those concepts are the same no matter what you're doing.

Okay, I see a few people have just joined. Welcome.

Thank you for joining. I'm just posting the link in the chat again so that you can join us for the class materials.

Okay, let's get started with talking about what equity value is.

Equity value is the value of the shares of the company.

It's what belongs to the owners of the business, the shareholders of the owners, right? If you've got a publicly traded company, so a company that's listed on the stock exchange, you have an observable equity value because you will have a share price and if you multiply that share price with the number of shares, that gives you the total market cap or total equity value, if you are an unlisted company, so you are a private company, you've still definitely got an equity value.

It's just not easily observable, right? So what we could do to try work hard equity value is we could look at how other companies are valued and then we can say, okay, well based on how other companies are valued, that's looking at multiples or comps, which we're gonna get to, then we can say, okay, well what does this imply about how our, our company should be valued? Or we could do a discounted cashflow valuation and say, based on the DCF valuation, we've done, let's now work out what the equity value should be.

Okay? But if you've got a listed company, the actual equity value number of shares times share price.

So let's calculate this for the company that I picked, and this was just kind of random, I picked Microsoft as the company to look at.

The reason being their bridge, the enterprise to equity value bridge is quite simple and that's good for fundamentals.

So Link is in the chat again, otherwise you can navigate topics Felix live and then just scroll down until you find today's session coming soon.

Valuation fundamentals, and it's this class file over here.

If you open up that class file, there's a number of different tabs.

I'm gonna go to the tab after the info tab, which is Microsoft Valuation.

I'm gonna use Felix to go and find the share price of Microsoft and the number of shares.

So I'm not sure what type of Felix access everyone has, but if you're able to do this with me, please do it together with me. Otherwise obviously just watch what I'm doing.

So on the homepage for Felix, under the analyze tab, you could type in the name Microsoft or I know Microsoft's ticker is MSFT.

So if you type in Microsoft or MSFT, you can see it's listed on the nasdaq.

Oh sure. So I'll just see someone's asking where are the files? So the files are gonna be under topics.

I think if you don't have access to the chat, you'll need to navigate there.

So just to show you, if you click on topics and go all the way down on topics to Felix live, you'll see all of these tiles.

You've gotta scroll quite a way down 'cause those are all past recordings.

As soon as you see near the bottom, the orange one coming soon, valuation fundamentals, Felix Live.

If you click on there, you'll come to this page and if you scroll down, there's the class file.

Okay? So hopefully that's helped. If not, let me know.

So for Microsoft, you might land on a different page.

To me, you might land on this categorized page where we see all of the public filings for Microsoft, their financial statements, press releases, et cetera.

I'm gonna navigate to the valuation tab and you can see Felix has an EV bridge and this is what we are gonna be doing.

We wanna understand where these numbers come from.

So the first thing we're gonna need is the price of one Microsoft share.

You can see it's in the bridge here, 4 0 1 0.72 or up at the top we see here it's from yesterday's close.

So from the 26th of February, closing share price.

So let's go put that into our spreadsheet. 4 0 1 0.72.

So on this first tab here, share price 4 0 1 0.72 to get the total equity value.

That's just the value of one share.

I want the value of all of the shares.

So I need to find the number of shares outstanding for Microsoft.

Now we see here we should be using the diluted shares outstanding.

That is getting more complex today we talking fundamentals.

But at the end of the session I will show you if you've got access to Felix, where you can find the playlist where we talk about dilution.

Coming back to our information in Felix for Microsoft, the shares outstanding.

We've got 7 4 2, 5 0.6 to see where that comes from.

For US companies, they've gotta report the outstanding number of shares on the front of the 10 K annual filings and 10 Q quarterly filings.

So if you click into that 7, 4, 2 5, you'll see Microsoft's filing, they filed for December, 2025.

So as of January 22nd, 2026.

So more up to date, there's the number of outstanding shares.

Obviously if we see in the press that there've been share buybacks or share issuances, we would wanna adjust that number.

But in the absence of that information, that would be the number that we use, right? Dilution, like I said, a bit more complex.

You've gotta take into account any things in existence that could become shares in future things like convertible instruments or employee stock options.

If we look in the bridge for Microsoft, they don't appear to be any of those.

And so the diluted is the same as the basic shares outstanding.

So let's go take that number.

I'm not gonna take all the decimals. So let's just take the 7, 4 2, 5 0.6.

So 7 4 2, 5 0.6.

That's the number of shares outstanding.

And then the equity value is gonna be the value of one share times the value of the number of shares.

And that gives me a total of almost 3 trillion US dollars.

Okay? It still surprises me when I see companies that are over a trillion dollars.

I know it. It feels like yesterday, I think it was Apple that was the first company to hit a trillion in the public markets.

Um, and I actually looked it up though 'cause it felt like not so long ago and I think that was 2018.

So actually that's a good few years ago.

Anyway, so Microsoft's shares in total are worth around 3 trillion.

Just a question in the chat. The session is being recorded and it will be posted um, under topics Felix live.

Okay? So it'll be posted probably on Monday. Okay? So guys, this is our equity value for Microsoft.

I've got a little bridge on the right hand side color coded because you're gonna see in a minute what we're gonna be doing with the balance sheet.

But let's go put this equity value in that we've just calculated, okay? And don't worry that balance check is totally off and my column's too narrow.

So let's just delete the check for now.

So there's the equity. Very important for people to realize if you are new to accounting, to valuation, there is a big difference between the market value of a company's equity and the book value of a company's equity book.

Value of equity is what we're gonna find on the company's balance sheet.

So let's go to Microsoft's balance sheet and see how the book value of equity compares to this $3 trillion market value we've just calculated and why there's a difference.

Okay? What I did on the next tab, Microsoft balance sheet tab, I copied the most recent balance sheet for Microsoft.

So I didn't wanna spend class time doing this, but you could do it pretty quickly.

If you go to the categorized tab for Microsoft and you go to the 10 Q.

So Microsoft has a June financial year end.

So their annual reports run to June every year.

So their second quarter results are to December.

So all I did is here, you can click into the whole big filing if you want, but we've got an extract of the balance sheet.

So if I just click on the BS and I then copy this, I pasted it into Excel and I just cleaned it up a little bit, put a bit of formatting on it, and I deleted the June, 2025.

'cause we don't want that. We want the most recent information.

So that's where I got the balance sheet of Microsoft from.

So let's take a look at that balance sheet. So we are on the next tab now, and I'll talk through the balance sheet in a bit more detail in a moment.

But at the bottom of the balance sheet here, we see the total stockholders equity.

And you can see that's quite different to the 3 trillion we just calculated.

That's about 391 billion equity on the balance sheet is at book value.

What that means is this common stock and paid in capital when Microsoft issues new shares to the public.

So that's called a primary issue.

Whatever money they get for that, that then goes on the balance sheet, right? And then over time, as Microsoft operates, they make profits, whatever they don't pay out as dividends.

That builds up, it accumulates, it's part of the retained earnings that belongs to shareholders.

So that also sits on our balance sheet.

And then we have some other equity accounts without going into all the detail, OCI, other comprehensive income or other comprehensive loss, these are kind of income and expense items that could hit your income statement.

But that is part of equity.

Now guys, this equity value reflects the value at the time when Microsoft issued those shares that could have been 10 years ago, 15 years ago.

When I look at the market value of equity today, I want to know, I don't care what has happened in the past, I'm looking forward, I'm looking at the future cash flows of Microsoft and that's what I'm buying today.

And so this forward looking valuation is what impacts that share price and consequently the equity valuation.

Okay? So big difference between historic book values, you do not put the updated market value of your equity on your balance sheet, okay? Market value we see being reflected in the share price.

So that is equity value.

Any questions guys, please don't be shy to ask if I maybe skip over it for now, I'll come back to it at the end of the session.

But please, in the q and a pod or in the chat, if you don't have access to the q and a pod.

So equity value we've spoken about, what we need to talk now is about enterprise value and what that is, how we calculate it.

So just to help us along, I've got a slide.

We start with a very simple example and I think it does illustrate the concept pretty well.

If you imagine a house, I own a house, that house value is 500,000, I have had to finance that house.

I put my own money in for 200,000. That's the equity value.

And then I borrowed from a bank.

So I got debt, I got a loan, I got a mortgage of 300,000.

That funding, another word for funding is capital.

That capital was then used, it's invested in my house.

If we link this to the concept of equity and enterprise value, the house's value is enterprise value.

If I wanna work out what belongs to the shareholders, what belongs to the owner of this house, do you agree that that house actually the value of that belongs to the debt holders and the equity holders.

So if I just want equity value, I've gotta take that house's value, the enterprise value and take off whatever debt there is because whatever's left over, that's the value to the owners of the house.

The reason we like enterprise value when we analyzing companies, when we comparing companies is because the enterprise value, just like the value of the house, is not affected by the way that the enterprise or the house is financed.

If I wanna sell my house, it is worth $500,000 whether I have got a mortgage or not.

Whether I've got a big mortgage or a small mortgage, the house is worth 500,000.

Equity value, on the other hand, is gonna be impacted by how I finance that house because we all agree if you sell your house for 500,000 and you've got a massive mortgage, there's less equity value for you.

If you've got no mortgage or a tiny mortgage, you've got more equity value.

So key learning point here is enterprise value, not affected by how something's financed.

So it's more comparable between companies. What are the actual operations worth versus equity value that is impacted by financing decisions? Now this is a nice example except with a company it's a little more complicated.

I do not like this word.

Asset value, enterprise value's not the same as asset value.

That's wrong, okay? But it works for the house.

If we go on and talk about a company's value, enterprise value is the value of the operations of the business, okay? It's the value of the operations.

It's not just the assets, it's the operations.

And then yes, we've got the funding, the capital, the debt and equity.

And then we might also have other assets outside the operations like cash.

Now when people maybe initially learn what equity and enterprise value is and the bridge, I must say when I first heard of the bridge, I thought it was something very fancy guys.

All the bridge is it's being able to navigate from equity value to enterprise value and vice versa.

That's all the bridges.

How do I go from enterprise value to equity value or how do I go the other way around? So that's what the bridge means.

Now, when people first learn the bridge, maybe you learn enterprise value is equal to equity value plus net debt.

Okay? Where does net debt come from? Net debt is just debt minus cash.

Just squash those two together and that's what we've got on the next slide.

In reality, the bridge can be more complicated than this.

Okay, let's go to Microsoft.

We are adding in a little bit more complication with Microsoft and then there's even more complication that I'll show you at the end with another company.

What I wanna do though for Microsoft is I wanna stick on the balance sheet tab.

That's what I wanna stick on.

Okay, I'm just gonna remove the bit of color for now.

So I wanna stick on the balance sheet tab.

I downloaded this from their financials. Okay? What I've done on the right hand side, and I think this is maybe a little bit tedious, but guys, in order to really under understand what should go in the bridge, which items sit outside enterprise value and outside of equity value, you need to understand how to break down a company's balance sheet.

And I think this exercise of visualizing it will really help understanding of the bridge.

So yes, it's a little monotonous, but bear with me and hopefully at the end we've got a bit more clarity on what should go in the bridge and what shouldn't go in the bridge.

If we go back to basic accounting account balance sheet, you've got all of the assets of the business on one side and all of the liabilities and equity on the other side, right? So assets, those are things that are gonna generate future benefits for the company.

Liabilities, that's what the company owes to other people.

It's obligations and then equities, what belongs to the shareholders.

However, when we look at the assets and liabilities of the business, we want to classify them as being either operating in nature, so linked with what the company does or financial in nature.

So that's what I wanna do with the accounting balance sheet that I've copied.

We've got all of the assets on the one side.

So let's start with those assets and I'm just color coding it so we can see easily what we are doing.

And then I'm just putting it horizontally next to each other.

Assets, liabilities and equity.

So if we start at the top of the balance sheet, cash and cash equivalence and short term investments, these two items are not actually part of Microsoft's operations.

Microsoft's operations and they do many things.

So the cloud computing, the chat, GPT stuff or not quite chat, GPT, but you know what I mean. The um, AI stuff, that's what I mean.

Ai, cloud computing, all of that stuff.

So that's part of their business, right? Software et cetera. The cash that they've got is not generating operating profits, right? Cash that you've got is generating interest maybe if that.

The same goes for short term investments.

Microsoft's not an asset management company, it's not their business to go and invest in government bonds and invest in shares.

This is if Microsoft's got some excess cash, they invest in some government bonds, they wanna earn a bit of a return.

That's not part of what Microsoft actually does.

So these are assets but they're not part of the operations of Microsoft.

So I'm gonna put that together.

I'm just gonna add the cash and the short term investments on the right hand side.

Next we're gonna go through all of the other assets and if it is operating in nature, we'll highlight it orange and then we can add all of that up. If it's financial, we'll highlight at gray accounts receivable, people that owe Microsoft money inventories other current assets.

Now for other, if I were doing this in detail, I would quickly search in the financials. Is there a note on what other is very often other is operating? So I'm just gonna include that with operating.

So those are all part of what Microsoft does.

Part of the operations, if we go to the non-current assets, so your long-term assets, property, plant and equipment and other assets that Microsoft has leased.

So they might not own all of their buildings, they lease some of their buildings, that's part of their operations, right? They need place to operate out of.

So that is part of operations.

But then we get to equity and other investments, equity and other investments.

This is financial in nature.

This is where Microsoft owns parts of other companies or other instruments, but they're not short term because the intention is not to realize the gain of that or sell it within the next 12 months.

These are longer term investments, but Microsoft doesn't control these.

If you control another company, you've got a subsidiary, you control it, you've gotta include all of their assets and liabilities in every single line of your balance sheet. You consolidate it. If you don't control a company, you then report it in another way and that's called an equity investment.

If you've got more than 20% usually but less than 50%.

And the point is you don't control that.

It's generating investment income as opposed to operating income.

And so that's not part of your operations.

I haven't dug into the numbers, but I imagine guys, Microsoft has got a stake in open AI but they don't control it.

I don't know quite how much they own, but I think it's more than 20%, maybe 27, 20 8%.

But I stand to be corrected.

But guys, that investment in open ai, I imagine that would sit here under equity and other investments.

They haven't consolidated it into their results because they don't control it.

But that does have value.

So that is not part of the actual operations of Microsoft.

That's generating equity income, investment income.

It's not generating operating profit.

Then we've got other assets like goodwill from having done previous acquisitions, intangible assets, other long-term assets.

Again, I would maybe dig into the other if there's a note on that, just see what's in there.

But often that is operating in nature.

So let's add together all of this orange stuff and that then should give us the total balance sheet values for assets.

And we've got 6, 6 5, 3 0 2 as the total assets.

And that does reconcile to what's on the balance sheet.

So I've just classified it on the right hand side.

We've gotta do exactly the same thing.

Now for the liabilities side of the balance sheet and equity, which we've already seen, if we start going through the liabilities, accounts payable is operational in nature.

That is Microsoft owing suppliers, maybe owing taxes, that's them owing.

Um, employee compensation.

So some of the stuff is broken out, right? So there we go. We've got accrued compensation, we've got taxes, we've got unearned revenues, other current liabilities.

Again, if there's a note to have a quick look in the financials, what other is simplicity? I'm assuming it's operating.

That is part of the ongoing operations.

You can think of that almost as being like spontaneous, right? As a result of being in business, Microsoft owes their suppliers, they owe their taxes.

Those are operating items that is different to debt.

I wanna split the liabilities between operating liabilities and debt.

Debt is borrowing.

I've gone to a financial institution or investors and I've borrowed money that's not operational.

Okay? So current portion of long-term debt that I'm gonna highlight in blue because that is a debt item, it's a financing choice.

If we then go to the long-term side of things or the non-current side of things there, I've got long-term debt.

So Microsoft has borrowed from banks or bond investors.

It's under long-term 'cause it's due after more than 12 months.

And then we've got long-term operating liabilities as well.

Taxes that we owe but not gonna be paid in the next 12 months after that.

So we've got long-term operating items, unearned revenue, deferred taxes, operating lease liabilities, and other long-term liabilities.

Just a note on leases point of today, keep it simple, we are gonna treat these leases as operating but be aware that they are complications with leases, especially if you are comparing us and non-US companies.

These operating leases, if you wanna do the comparison, we would classify those as being financial in nature.

Okay? But that is just a thought in your head to think about, oh I've heard something about leases.

I can show you where to find info on that afterwards if you're interested in taking this further.

So for now, we classifying those as operating.

So let's go put this all in on the right hand side and see what we come up with.

So I've got the operating liabilities, adding up all the stuff that we identified in orange, and then the debt is just the blue ones, which is not that much to add up.

And then equity, we already identified that 390 billion or whatever it was.

Let's go pick up the sum of all the equity items or we could just pick up that total and I should just color code these for completeness sake.

There we go. And now we need to check our balance sheet balances.

Okay, there we go. Check balance sheet balances.

Now this is a long exercise like I warned you, it is a bit tedious, okay? I promise you I'm going somewhere with how this ties in with valuation.

Any questions before we move on? Okay, so underneath this, what I now want to do is rearrange the balance sheet so that it's more useful from an analysis perspective.

Accountants have to put all of the assets together and all of the liabilities and equity together.

We can do whatever we want for analysis.

So what I've done underneath is all I've done differently is I'm setting off or netting off the operating assets and the operating liabilities.

Everything else is staying the same.

So cash and short-term investments, I'm just gonna go pick the number up from my CU at the top.

Other financial assets, same picking it up from the top.

All I'm doing now is netting off the operating assets with the operating liabilities that gives me the net operating assets.

That means that on the left hand side I now have the operations plus any other financial assets.

And that means on the right hand side there's nothing operational on the right hand side we just have the capital, the debt and the equity.

So the right hand side, now we've just got the debt and we've just got the equity balance sheet still balances, okay? But we've now just rearranged it to be more useful.

So how on earth does this tie in with valuation and with the bridge guys, we will already talked about equity value and we've calculated it.

We've said this equity value is the book value of equity.

We are gonna get the market value of equity, which we did by taking Microsoft's share price, right? Enterprise value you is what this orange block represents the value of the operations of Microsoft.

However, this is not enterprise value because this is book values.

That 320 billion that's got the value of Microsoft's machinery or buildings, that's not the value of Microsoft.

The value of Microsoft is what's gonna be done with those assets, right? And we are not just looking at the assets, we are looking at the net assets, taxes and accrued expenses and payable.

So all of that is captured in the operations.

So what we wanna do is we wanna come up with a market value of that orange block.

How do we come up with a market value for the orange block? Well if I have the market value of equity, I know the balance sheet needs to balance, I've got the market value of equity, I know what the debt of the business is, I know what the cash is, I know what the financial assets are, I can then calculate the market value of the enterprise and guys that is going over the bridge.

Anything that is outside of the orange and yellow blocks forms part of the bridge because the bridge is taking me from yellow to orange or vice versa.

So anything outside enterprise value and equity value goes into your bridge.

Okay? There is another way to calculate the market value of that enterprise value.

Like I said, if you don't start with the market value of equity and go that way round, you could using multiples, which we're gonna get to.

Now you can say well based on where other companies are trading, where should Microsoft be valued as an enterprise? So you can come up with the EV that way and then go over the bridge and say, well what should the equity value be? Or you could do a discounted cashflow valuation.

What should the enterprise value be? Go over the bridge.

Oh, what does that say about the implied share price? Let's finish off this bridge for Microsoft.

So if we go to back to our Microsoft valuation tab, I did um, make space to do it vertically underneath. That's how Felix does it.

But actually I'm gonna leave that in the interest of time.

Let's just do it how we've been uh, doing it with our bridge.

So we've worked out the market value of equity for Microsoft using the share price.

I know value of debt I can get from the balance sheet.

You don't need to have the entire balance sheet done like this.

You could just go straight into Microsoft's financials and go add up whatever debt there is.

So that's 42 6 2 of debt.

So that tells me the value of everything on the left hand side.

This capital is invested in the operations of Microsoft and then there are some other assets that are not operating assets.

There's other financial assets and short term investments.

So if I just want the value of those operating assets on their own, what I'm gonna do is I'm gonna say, okay, I know what cash is.

So cash is, let's come back here.

Cash and financial assets is the 89 4 6 2 other financial assets.

The value of that we got from the balance sheet of 21 2 0 2.

And now this is just mathematical, right? What does that mean? Enterprise value is, well equity plus the debt together is worth 3 0 2 3.

That gives me the value of the operations and any other assets.

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

So let me deduct the value of the cash and the value of the other investments and that will leave me with the enterprise value of 2 9 1 2.

And that's now not called net operating assets.

That is EV because it's at market value.

Just a question in the chat, don't worry.

The value of debt, that 42 62 value of debt, we got that from Microsoft's balance sheet.

It's the current part of the long term debt, the part that you have to pay within the next 12 months and then the part that you're gonna pay after 12 months.

So the sum of those two together is the 42 62 and that then gives us the debt over there.

Okay? So hopefully that helps. But if not, let me know.

Let's see if this is what is in Felix and I know it's gonna be slightly off because I think Felix rounds the um, number of shares.

So Felix rounds the number of shares whereas we haven't round, uh, we we've rounded the number of shares but Felix doesn't round the number of shares. So we're gonna be slightly off, but let's just have a quick look to see if we go back to this valuation tab.

So our diluted market cap, that's equity value 2 9 8 3 0 2 3.

So that's where we slightly off, right? We oh one two, it's oh two three we off by 11.

That's just because of rounding of the number of shares.

But if we look in the bridge, let's look underneath here in the bridge, what's in the bridge debt of 42 6 2 and the person asking about where did I get debt from? If you've got access to this in Felix, if you click on there, you'll actually be able to then click through to the financials and see where those debt numbers come from.

So that 42 6 2 that agrees with our debt number.

And then short term financial assets and cash, the 89 4 6 2, that's what we've got.

And then we've got the long-term financial assets, the 21 2 0 2 and so we've got enterprise value of Microsoft.

Any other questions before we move on to talking about multiples and how we gonna use this enterprise value? Like I said, you can go the other way over the bridge as well.

If we wanted to check what do we think the equity value should be, I could start by actually calculating enterprise value by using a multiple, which we're gonna do now or by doing a DCF and next week's Felix live is on DCF fundamentals that I'm doing.

So how do you calculate that directly and then you go this way over the bridge? Well let me add whatever else is in the company of value and then I will take off the debt and I'll work out what equity should be.

So you can go the other way as well. Okay? I'm very conscious of time as always seems to fly by when you are having fun.

So um, let's go to working out the multiples and talking about multiples.

Okay? Do you know sometimes when you just think to yourself why I think maybe I'm blaming it on being tired and Friday, but my jokes are honestly so bad.

You do actually have to laugh anyway, okay, enterprise value and equity value multiples.

What is a multiple? Why do we use multiples? If I wanna compare the values of companies, I am saying okay, Microsoft is trading here.

Where do I think a similar company may be Apple, where should they be trading? And we've gotta be very careful to try pick similar companies, right? You can't compare companies that do completely different things.

There's no point in comparing where Microsoft is trading with where Coca-Cola is trading different business, different dynamics.

Value is gonna be impacted by growth, by profit, margins by risk.

So you've gotta make sure that you are starting off with a comparable universe of companies to begin with and then within that you can say okay, well this one's growing a bit more or less or less risky. And then you can start thinking about why companies should be valued a bit differently.

But let's say, okay, I wanna compare where companies are trading, you can't look at the total value of the company because companies are different sizes.

You can't say then, okay, we'll look on a per share basis because the number of shares is arbitrary.

One company could have loads of shares that they split their value into, another company could have fewer shares over which they split their value.

So that's not gonna help.

So it's like if you go and look at houses, you can't say oh the $2 million house is expensive and the $500,000 house is cheap because maybe one is a three bedroom, the other one's a studio.

So with a house we would wanna get a per square meter value or price or a per square foot price.

And then obviously making sure I'm looking at houses that are in similar condition, same area because otherwise the comparison wouldn't quite make sense.

So what I wanna do with value of a company is I wanna do the same thing, I want it per square meter.

But what would make sense is to link it to an income statement item.

What drives that value? So that's what I've got on the slide here.

We've got two levels at which you can calculate multiples and you do get other multiples for different industries.

Industry specific stuff like price to book and different kinds of things.

Let's keep it big picture, simple enterprise value level.

Remember enterprise value that gives me the value of the operations of the company.

Now what is closely linked with operations on the income statement, that's gonna be EBIT, EBIT, earnings before interest before financing impact.

That is your operating profit, right? So that's your operating profit.

So enterprise value relative to EBIT, I get a multiple of 10 times.

So the enterprise value is 10 times the operating profit.

If I go down to the equity level or the share price level here, we've gone over the bridge, we say okay, the enterprise is worth a thousand.

On top of that, on the left hand side of that diagram, they've got this cash.

That's the value that belongs to everyone on the right hand side.

Let me take off what belongs to debt holders? That gives me what belongs to equity holders.

So this is going over the bridge the other way.

Equity value or on a per share basis, what is that closely linked within the income statement that's closely linked with the bottom line because that's what belongs to shareholders after interest, right? So I've got net income or on a per share basis, earnings per share. And then we get the price to earnings ratio, which is 13.3 times.

So how could I use this? I'm trying to value a company that's similar to Microsoft and I say okay, well Microsoft is trading at 10 times and I think this company is almost identical.

Same growth profile, same risk, same margins, et cetera.

So if my company's EBIT is a million, that implies that the value of the company in total should be a million times 10, 10 million.

Okay? So that's how we would apply the multiple.

Let's finish off by calculating these multiples for Microsoft.

What we've got, if we go back to our spreadsheet, so let's just put in, so I didn't do the bridge vertically.

So you can see here we've got the elements of the bridge, but let's just link to our bridge there, right? So I'm just linking to the calculations that we've done.

Equity value and enterprise value. Okay? So I'm just linking over here. We need the earnings.

Now when we do valuation, we look forward.

So we are not generally looking backwards at what earnings have been achieved in the past.

That's more for credit analysis.

For valuation, we tend to look forward.

So you can see here I want the earnings, the upcoming earnings for Microsoft and they next reporting their earnings in June, 2026 because their year end is June.

Now we've got ebitda, so that's operating profit EBIT, but we've added back depreciation and amortization as well.

That's because DNA not a cash item.

So people say Oh well then EBITDA closer to cash.

Also it makes companies more comparable in the sense that you um, could have different policies or you've got different DNA because you've done lots of acquisitions in the past.

So EBITDA level you might look at, okay, there are caveats to that but we're not getting into that today.

So where am I gonna get this forward looking earnings from? If I go back to Felix, if you go down to the bottom, I'm just gonna zoom out a bit, we can see that we have got consensus estimates.

So the financial year for Microsoft ends in June.

So the first upcoming financial year for June equity research analysts, I think we pull this from um, FactSet.

Okay? Um, equity research analysts, these are their consensus forecasts for revenue EBITDA is what I'm looking for for June, 2026.

So let me copy that ebitda and if I come back to my spreadsheet and paste it, I'm just gonna paste it as text so it keeps nice formula.

And then I can go and do the same thing for the earnings per share coming up in June, what's expected, it's 16.48, so 16.48 and now I can work out a multiple Microsoft's enterprise value relative to their EBITDA is 14.7 times and Microsoft's share price if we go all the way back up to the top to get the share price compared to the earnings per share for the upcoming financial year, that is 24.4 times.

Now if you are in Felix, you might have noticed that these numbers if you scroll up, are a little bit different to what's in this table.

We haven't made a mistake though.

So Microsoft, if you scroll up, they've got a PE of 22.6, our PE is 24.4 and then they've got an EV to EBITDA of 13.6 and ours is 14.7.

The reason for that is we are looking at the financial year here to June, whereas for comparison purposes across different companies with different year ends, what we've got here is calendar year, so CY so to December, okay? So there's calculations that happen in the background and if you click on there it gives you the definition of how it's calculated.

But we do have some playlists on calendarization as well.

So any questions please ask.

Okay, we've got 10 minutes left and there's a few things I wanna point out here.

Okay, one of them is that the bridge can get more complicated as I mentioned.

So if you go to a company like Coca-Cola, so KO is the ticker for Coca-Cola.

If you look at the bridge for Coca-Cola, we've got the dilution adjustment.

If you are interested you can click in there and see where these numbers are coming from.

We've then got non controlling interest as one of the items in the bridge.

Non-controlling interest if we think about where that is. So this has got to do with consolidation accounting guys, going back to our basic balance sheet diagram.

If it is on the liabilities and equity side, which it is, it's gonna go in the bridge on the right hand side, that non-controlling interest is like additional funding in the business, right? It's parts of your subsidiaries that your shareholders don't own.

So that would go on the right of the bridge. Okay? The same goes if you scroll down, there's a pension liability.

If you've got an underfunded pension pension, which side of the bridge would that go on? It's debt like in nature.

And so that would go on the right hand side.

Short term financial assets and cash, long term financial assets.

So that would include monster.

They've got a 20% stake I think in Monster.

Where do assets go in the bridge assets on the left hand side.

Okay, while we are talking here though, extra complications, you should try put your bridge items in terms of market value.

Guys included in that 22 7 9 long-term financial assets for Coca-Cola, they've got their stake in Monster.

Now the way it's accounted for at book value, that would be whatever Coca-Cola paid for Monster when they bought it however long ago, whatever stake they bought.

And then you do a little bit of adjustments, you know, for the earnings et cetera as time goes on.

But ultimately what I would wanna do is go see where's monster trading, what's the market value of Monster, what's the value of that stake? Okay? So these are all the complications that we can then add on to the bridge.

But today the purpose was to just understand the bridge.

Last thing I wanna show you before I wrap up, we've got one more sheet here which is EV versus equity multiples.

Now today again we just introducing multiples but have a look, um, obviously offhand don't know all the Felix live sessions, but on if there's a session on trading comps, comparables there we talk a bit more about why should companies trade at different multiples, what drives different multiples.

But one thing I wanna point out for now is why we like enterprise value multiples compared to PE multiples or equity multiples where companies have different capital structures.

So last quick calculation we're gonna do, I've got two companies here, hypothetical examples, we've got enterprise value, right? Same for both companies.

So enterprise value, say we've done a DCF, we get the enterprise value.

Same for both companies. However, company A has lots of cash and no debt.

If you think about going over the bridge, I'm gonna add the cash to enterprise value, I'm gonna subtract debt.

So I'm gonna have a high equity value here because there's no debt and there's lots of cash.

Whereas for the second company they've got no cash and they've got a lot of debt.

So you are going to have a lower equity value for the second company, right? Because enterprise value's the same, I'm adding no cash but then I'm subtracting debt and I'm getting this low equity value.

If we look at the income statement, the value driver, same EBIT for both companies a hundred.

So operationally they are identical but because the ones got cash, they've got interest income, no interest expense 'cause there's no debt and the other one has got no interest income but lots of interest expense because they've got debt.

What does that mean in terms of multiples enterprise value relative to EBIT? 10 times, right? Same calculation.

I could just copy the formula down, but let's reiterate enterprise value divided by EBIT, 10 times identical.

That makes sense. Operationally these companies are identical.

Okay, if I was gonna buy this company, what I'm actually buying runs the same, creates the same value, same multiple.

Let's have a look at PE share price versus earnings per share.

23.8 times for the first company and if I copy that formula down, it's 4.8 times for the second company.

Now imagine I just looked at the PS for these two companies, I would say, wow, this company looks like it's very highly valued.

I could maybe say, is this company expensive? Or I could look at this company and say, oh that's got a very low multiple, is that cheap? Also, if I'm trying to apply this to another business, which of these two multiples should I use? Is it 23.8, is it 4.8? But guys, what we are missing here is that these two businesses have very different capital structures.

One has no debt and lots of cash, the other has the opposite.

So they should have different equity values and they should have different PE multiples because they are financed differently.

And so in this case where you do have companies with different capital structures, what cuts through that is to look at the enterprise value level and then we put the capital structure of the company when we go over the bridge.

Okay? So that's just what I wanted to illustrate the impact of different capital structures, what that can look like in terms of EV versus PE multiples.

I've got a few minutes left.

So to wrap up, um, hopefully you found today's session useful.

It is just an introduction like I mentioned, there's lots more that you could do.

So if you've got access to this on Felix, I'm not sure, like I said, I know not everyone's got exactly the same access but just to show you where you could find this information. If you go to topics, investment banking and then you go to valuation, so topics in best investment banking valuation, what we've basically done today is valuation fundamentals and those other two spreadsheets in the um, that that were uploaded have got separate exercises to reiterate this.

So you could go have a look at that.

DCF fundamentals I'm doing next week EV to equity bridge goes into more detail.

And then guys here trading comps.

If you wanna work out how should you calculate diluted number of shares we mentioned diluted in this trading comp spread, uh, spread list playlist, you find the videos here, okay? And then I mean you can see there's lots of good stuff, trading, comps, analysis, et cetera. And if you scroll down we start getting into the complexities.

So things like trying to put things at market value, looking at pensions, looking at leases and all that other good stuff.

Okay, so I think that is all from my side.

So I'm gonna say thank you very much for joining and I hope to see you uh, next week.

Our DCF fundamentals.

I do see that I have got a question in the pod, so I'll answer that. But for those that are logging off, thanks very much for joining.

Let's have a look at the question.

Let's go over the NCI, the intuition being behind it, being on the bridge.

Excellent. Okay, let's talk about NCI.

So just again, I'm always going back to Felix to just show where you can find stuff on this 'cause it's quite hard to um, go through the concepts if maybe you don't have the accounting background.

So just in case if you go to investment banking, accounting consolidation, okay, introduction to full consolidation, that's where we talk about NCI, et cetera.

Now if we think about what NCI actually means, so let me just open up Coca-Cola's financials quickly, so I don't know how I close that down.

But let's just quickly go back into Coca-Cola and let's just go to their balance sheet.

So Coca-Cola's balance sheet, Coca-Cola owns subsidiaries, right? So they've got other companies that they own.

If they control them, normally that means owning more than 50% of them.

If they control them, it means that they have to include a hundred percent of the assets and liabilities on the balance sheet.

Okay? A hundred percent NCI comes into play where Coca-Cola does not own a hundred percent, they actually only own say 80%.

Now because they control the business included in the assets, included in the liabilities is a hundred percent of that subsidiary.

But surely I've gotta recognize that not all of that value belongs to Coca-Cola shareholders.

If I go buy a share in Coca-Cola, I'm not entitled to a hundred percent of the subsidiary because there's other shareholders, the NCI that own part of those subsidiaries.

So the logic behind it being on the bridge, if I put this in very simple terms, if we think about this enterprise value, let's just go back to Microsoft.

So that enterprise value that includes a hundred percent of the subsidiaries value, right? But actually of that 100% subsidiaries value, not all of that actually belongs to Coca-Cola's shareholders, part of that subsidiary other people own.

So it's like additional funding for that enterprise.

So that is simplifying it a little bit, but that is the gist of it.

So I don't know if that helps at all, if you wanna follow that up with a follow up question.

Okay, excellent. I see that seems to have helped. Great.

Any other questions before I shut the meeting down? If there's nothing else, thanks very much for joining and like I said, hope to see you next week where we are gonna look at DCF fundamentals.