There are many different methods and techniques which can be used to calculate the size of a company. The enterprise multiple is a ratio that is sometimes used when determining the value of a company, it differs from other techniques in that it models the firm in the same way that someone looking to acquire it would. This means that the enterprise multiple factors in any debt that a company has and considers these against other multiples; the price to earnings ratio, for example.
What is an Enterprise Multiple?
Before an analyst is able to derive an enterprise multiple for a business, they will need to first establish that business’s enterprise value. Calculating a figure for the enterprise value will require knowledge of a company’s market capitalization, their minority interest status, the value of any debt they have against them, and a few other key pieces of information.
Once the enterprise value for a business has been calculated, an analyst can then divide this figure by the earnings before interest tax depreciation and amortization (EBITDA). You can read more about industry multiples here.
How are They Implemented?
Enterprise multiples are useful instruments that allow investors to establish whether a given business has been overvalued or undervalued. When the enterprise multiple is low this can imply that the business it has been calculated for has been undervalued. Correspondingly, a high enterprise multiple is indicative of a business being valued beyond what it is actually worth.
When trying to assess the value of a transnational company, the process is often complicated by the distorting effect that results from differing tax policies in different countries. Using the enterprise multiple is also an increasingly popular means of identifying potential candidates for takeovers, it is well suited to this because the enterprise value informs the multiple factors in the business’s debt. Companies that score a low enterprise multiple are the best takeover candidates.
Sometimes it is better to establish how well two businesses perform when their performance is measured relative to one another. The enterprise multiple provides a useful metric for comparing businesses which operate in the same industry.
Why is it Used?
Unlike some other assessments of businesses, the enterprise multiple factors in both the debts and the assets of a company. This means that it provides a well rounded and balanced assessment of a company’s health. While the enterprise multiple is a useful measure of a business’s overall health, it is most effective when it is used alongside other methods.
For those who are looking to identify initial investment opportunities, there might be some more useful calculations for informing those decisions. However, the enterprise multiple is a great way of gaining an objective insight into a business’s short and long term help.
The enterprise multiple is one of a number of methods which can be employed in order to establish the health of a business. The enterprise multiple has a number of advantages of other methods, but like all methods it needs to be used appropriately and in conjunction with other useful measures.