Question

.   

S.N	Perticulars	Company-A	Company-B
1	Revenue	230000	200000
2	Expenses	215000	187000
3	EBIDTA	15000	13000
4	EBIT	12500	10300
5	PBT	11700	9750
6	PAT	8500	6950
7	number of shares	2,00,00,00,000	1,50,00,00,000
8	share price	423	344
9	Total Assets	1,00,000	86,000
10	Total Liabilities	66,000	62,000
11	Debt (Long+short term)	22,851	19,593
12	Cash and Cash Equivalents	700	1100
13	Investments	10825	6105

Above is the financial and market data for two companies A and B. Evaluate company A and B using multiple approach.analyze and provide observations based below two parameters.

a) P/E ratio

b) Price/Sales ratio

Calculate enterprise value(EV) of both companies and analyze on following parameters.

c) EV/EBIDTA

d)EV/Sales

Please provide Excel formula also for better understanding.

Answer 1

Assuming the above data is given in millions, the multiples are calculated as below for Company A and Company B:

Part 1 - analyze information based upon multiple approach:

Company A:

Formulas used:

EPS = Profit After Tax / Number of Shares

Price/EPS ratio = Price per share / EPS

Price/Sales ratio = Price per share / Sales per share

Company B:

Observation - Company A has a higher price to earning per share ratio of 99.53 while Company B has a lower price to earning ratio of 74.24 which means company B is valued cheaper. However, when it comes to Price to its sales ratio Company A is producing higher revenue per share (3.68) compared to company B (2.58), which is also why Company A demands a higher value in the market with a price to earning ratio of 99.53. Just keeping these two multiple in mind, it shows that Company A is a better company which has a better sales per share metric the Company B.

Part 2 - Calculating Enterprise Value

Formula Used:

Enter price value = Market Capitalization of company + Debt - Cash

Market Capitalization of company = Number of Shares * Price of Per Share

Company A

Enterprise Value (EV) = (2000000000*423/1000000) + 22851 - 700 = 8,68,151 million

EV/EBITDA = 8,68,151/15,000 = 69.45

EV/Sales = 8,68,151/2,30,000 = 3.77

Company B

Enterprise Value (EV) = (1500000000*344/1000000) + 19,593 - 1,100 = 5,34,493 million

EV/EBITDA = 5,34,493/10,300 = 51.89

EV/Sales = 5,34,493/2,00,000 = 2.67

Given the above metrics, Company A is able to generate higher value for its stakeholders mainly Equity and Debt holders in terms of operational profit (EBITDA) and sales for the entire value of the capital being invested in the company by its stakeholders.