Multiples

Valuation Multiples: Enterprise Value (EV): EV is a market value measure of a company from the point of view of the aggregate of all the financing sources; debt holders, preferred shareholders, minority shareholders and common equity holders. Because EV is a capital structureneutral metric, it is useful when comparing companies with diverse capital structures. Enterprise value = Share Price* Total Diluted Shares(it includes the common shares as well as the convertible debt, options & preference shares which have the option of being converted into shares) + Debt + Minority interest + Preferred equity -Cash and cash equivalents. EBITDA: EBITDA measures the cash earnings that may be applied to interest and debt retirement. The holder of debt is concerned with the business's ability to pay the interest and to repay the principal when due. Since interest is paid before profit tax is levied, then s/he should ignore taxes. Debt holders ignore depreciation and amortization because they are non-cash charges and thus do not interfere with a company's ability to repay debt; additionally, such figures are merely a reconciliation of cash-basis accounting to accrual basis accounting and are subject to a certain degree of flexibility corporate accountants have when setting depreciation and amortization schedules Enterprise Value Multiples 1. EV/ Sales This multiple is calculated by: Enterprise Value/ Sales. EV/Sales is a valuation measure that compares the enterprise value of a company to the company's sales. EV/sales gives investors an idea of how much it costs to buy the company's sales. Generally the lower the EV/sales the more attractive or undervalued the company is believed to be. 2. EV/EBIT = Enterprise Value/ Earnings before interest and tax.. EBIT stands for Earnings Before Interest and Tax. It is the profits of the company before the impact of interest income, interest expense and tax expense. As such it is an indicator of the earnings of a business excluding the impact of its cash holdings and borrowings. EV / EBIT ratio indicates how many times the market values the operational result of the company. A low ratio suggests poorly efficient use of a company's resources, even if its profit margin is high. 3. EV/EBITDA = Enterprise Value / Earnings before interest, tax and depreciation and amortization. EBITDA is the measure of cash returns that accrue to all the shareholders in aggregate. It compares the value of a business, free of debt, to earnings before interest. The first advantage of EV/EBITDA is that it is not affected by the capital

structure of a company. EV/EBITDA also strips out the effect of depreciation and amortization. These are non-cash items, and it is ultimately cash flows that matter to investors. Price Multiples 1. P/E =Stock price/ Earnings per share. The P/E ratio (price-to-earnings ratio) of a stock (also called its "earnings multiple") is a measure of the price paid for a share relative to the income or profit earned by the firm per share. A higher P/E ratio means that investors are paying more for each unit of income. The price per share (numerator) is the market price of a single share of the stock. The earnings per share (denominator) is the net income of the company for the most recent 12 month period, divided by number of shares outstanding. In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. 2. P/B: =Stock price/ Book value of shares. This ratio is used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. Book value is an accounting term denoting the portion of the company held by the shareholders; in other words, the company's total assets less its total liabilities. A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company. This ratio also gives some idea of whether you're paying too much for what would be left if the company went bankrupt immediately. As with most ratios, be aware this varies by industry. 3. PEG: A ratio used to determine a stock's value while taking into account earnings growth. The calculation is as follows:

PEG is a widely used indicator of a stock's potential value. It is favored by many over the price/earnings ratio because it also accounts for growth. Similar to the P/E ratio, a lower PEG means that the stock is more undervalued.

Other Multiples ( Mostly used in Credit Statistics ) : 1. EBITDA/Cash Interest Expense: This ratio is a type of coverage ratio. EBITDA is the measure of operational efficiency of a company. EBITDA gives the total cash flow generated by the company. The ratio shows the ability of the company to service the interest generated out of its debt obligation. A high ratio suggests either the company is performing well enough & generating a healthy cash stream to pay off its interest to the creditors or the capital structure is such that it has got lower amount of debt to service. Usually a high ratio is desirable. 2. (EBITDA-Capex)/Cash Interest Expense: This is again a type of coverage ratio which also takes into account the investment made by the company for improving future performance of the company. Generally the word capex (capital expenditure) is used to represent the investment made by the company in purchasing plant, property & equipments. This ratio tells how much liquidity is left with the company to pay off its debt holder even after taking into account the future expansion & betterment of the company. As in the other coverage ratios a high value is desirable and indicates that the company is generating enough cash flow to take care of its expansion needs as well as servicing of its debt. 3. Total Debt/EBITDA: This ratio gives the payback period of the company or the time required to pay back its debt. It shows how many years of operating earnings are needed to payoff the debt. A higher value might indicate that the company has either too much debt in its balance sheet or generating too little operating earning. 4. Total Debt/(EBITDA-Capex): This ratio shows the operating earning available with the company after taking care of its expansion & investment in betterment of the company to payback its debt. Ideally the denominator should be high which would indicate that the company is generating enough operating earning to cover both its capex as well as debt. A lower ratio is ideally desirable which will indicate that the company will payback its debt in fewer years. 5. Total Adj Debt/EBITDAR: Adjusted debt is a metric that shows a company's overall debt situation by netting the value of a company's liabilities and debts with its cash and other similar liquid assets. This measure adds up all of the debt, including the hidden debt from the operating leases, and subtracts the cash on hand to get a better picture of the true leverage of the company. Calculated as: Adjusted debt = Short term debt + Long term debt + Capital Lease + capitalized rent expense (Rent expense*8) - Cash & Cash equivalent EBITDAR (Earning Before Interest, Depreciation, Amortization & Rent) is used to evaluate companies in sectors, which rely heavily on such techniques as leases, saleleasebacks etc. This is often the case of cinema theatres or haulage companies.

EBITDAR is also relevant when companies with different rental policies are compared. Within the calculation, ratings agencies multiply operating rents by eight to account for all of the lease costs in order to approximate the amount of debt these leases represent. A retailer may have hundreds or thousands of leases, all with different end dates, escalations, renewal clauses, etc. It's simpler and reasonably accurate to take prior-year operating rent times eight. This ratio is again a payback ratio which shows the time period required by the company to payback its debt. 6. Total Debt/Total Capitalization: A company's capitalization describes the composition of a company's permanent or long-term capital, which consists of a combination of debt and equity. A healthy proportion of equity capital, as opposed to debt capital, in a company's capital structure is an indication of financial fitness. Debt/total capital measures how much of a company's total "capitalization" is made up of debt. Total capital is a tally of all the outside investments management has used to finance the business — everything from equity (the amount of stock sold) to long-term debt. Ideally it is suggested that debt should not be more than 50% of the total capital unless there's a specific reason to carry more — a strategic acquisition, for instance, or a temporary buildup to enter a new business.