Skip to main content
Message Font: Serif | Sans-Serif
No. of Recommendations: 2
If you know this much about the company and you're happy with its prospects then it should prove to be a good long term investment.

Enterprise Value is the value attached to the actual business regardless of the debt it is carrying or outside equity interests. Perhaps the simplest way to explain it is to compare it to buying an investment property.

Investment Property = $100,000
Mortgage (Debt) = $50,000
Gross Rent = $10,000 pa
Property expenses = $2,000 pa
Net Rent before Interest Cost & Taxes = $8,000

So to compare this to a public company on the stockmarket
Enterprise Value = $100,000 - what you would pay if you were to buy the company and ignore the debt attached to the value of the business.
Net Rent = EBIT ($8,000)
Net value = $50,000 which equates to the value of a share because when you buy a share you also buy a share of the debts of the company as well.

In this scenario the property is selling for 12.5 times EBIT.

By using Enterprise Value it becomes easier to compare like with like in assessing the values of companies. I only ignore the debt for this calculation - how much debt as determined by the Debt/Equity ratio is very important and I usually like it to be below 50%.

Don't get too hung up on determining the value of the company. I am an accountant and have experience in buying businesses so I always calculate the numbers - its my comfort zone. But as time has gone on I now believe understanding the economics of the business and the integrity of management are more important than determining an exact value of a company.

As long as the price is reasonable value (say somewhere between 5 - 12 times EBIT depending upon the industry) then qualitative factors that I have mentioned before will be the determinants of whether you have a successful investment on your hands. If the price is unreasonably high but you still feel committed to the company then you need to sit on your hands and wait or use dollar cost averaging very slowly so as to avoid paying too high a price. The rate of return on an investment is determined as much by the buying price as the selling price.

This point has been Warren Buffett's comparative advantage - to act rationally when everyone else isn't. Don't need to be especially smart, but you will need to be rational and wise. This is harder than it sounds.

If you consider some of the really successful companies of the past decade or so on the Australian stockmarket (Westfield Holdings, Flight Centre, News Corporation, Harvey Norman, ARB, QBE etc...) then management and how they treat shareholders has been a key determinant.

Hard to suggest any one book or course. Read everything you can get your hands on about Warren Buffett and Charlie Munger. There are some excellent articles by Carol Loomis at Fortune magazine available on the internet which are good reading and easy to understand. Could also try
-Ben Graham's book "The Intelligent Investor"
-Fishers 'Common Stocks and Uncommon Profits'
-John Trains "Money Masters' books.

As far as web sites go
- is the web site for Tweedy Browne who used to be Warren Buffetts stockbrokers and has some good reports on it.
- (I think this is the address) is the web site for Bill Ruane who runs the Sequoia Fund and is a good friend of Warren Buffett.
- Hunter Hall Value Growth Trust Annual Reports. Need to get the Annual Report, not the prospectus. Ring 1800 651 674 to get a copy sent out.

This should keep you occupied for a while - Happy reading!!

Print the post  


When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.