In the last article we talked about the main indicators for evaluating the effectiveness of a company, in this article we will show a concrete example of the calculation of some of them. This can be useful for the following purposes:
- analysis of the company before making a decision to invest on the stock exchange in shares or CFD on shares in Forex;
- comparison of the data obtained after the calculation with the data officially published on the site (there are often discrepancies, the actual figures turn out to be worse than statistical ones);
- for a comprehensive analysis of several companies versus industry ratios.
Practical example of calculating the EV / EBITDA ratio
The easiest way is to find both indicators from the formula in the official reporting of companies. And if EV most likely will have to be calculated by yourself, then EBITDA is on the website of many companies. On the other hand, each company has its own approach to the calculation of this indicator, because the calculation of EV / EBITDA will not be completely objective. It is better to use your unified approach for all analyzed companies. An example of a manual calculation of the multiplier is given using Rosneft’s 2016 statements.
- EV. We capitalize the company by multiplying the price of shares (ordinary and preferred) at the end of the reporting period and their number. A simpler option: we find the required information in the “Listing / Quantitative Indicators” section on the IB website. Rosneft capitalization – 4,240.33 billion rubles.
To calculate net debt, go to the Rosneft website and find in the balance sheet liabilities the articles of short-term and long-term liabilities (2 773 billion and 4 531 billion, respectively).
From the amount of liabilities you need to deduct money – in the consolidated balance sheet is the amount of 790 billion rubles.
EV = 4,240.33 + 2,773 + 4,531-790 = 10,754.33 billion rubles. This amount must be paid to the investor in order to repurchase all the shares and, taking into account the funds of the company itself, to pay off its debts.
- EBITDA. To calculate an indicator using a simplified formula (IFRS standard) you will need:
- earnings before tax and depreciation (profit and loss statement) – 317 and 482 billion rubles;
- The amount of interest paid and received (cash flow statement) is 143 and 58 billion rubles.
EBITDA = 317 + 482 + 143 – 58 = 884 billion rubles.
EV / EBITDA = 10 754.33 / 884 = 12.16. This means that the investment in the company will pay off just over 12 years. How much or little this can be judged solely in comparison with other giants of the oil refining industry. Moreover, it is far from a fact that the payback period of investments from small companies will be longer than that of companies from the TOP. A good option to assess the effectiveness of the company.
A practical example of calculating the Net Debt / EBITDA ratio
Again, we use the reporting of “Rosneft”. Recall that according to the results of the calculation, the amount of EBITDA was equal to 884 billion rubles.
Balance is enough to calculate net debt. We summarize the data on short-term and long-term debt: 2,773 + 4,531 = 7,304 billion rubles. True, there is another approach. In this calculation, you can take the entire amount of the debt, while some investors deduct from it tax liabilities.
We subtract from the total debt cash and cash equivalents (790 billion rubles), accounts receivable (485 billion rubles). Theoretically, only receivables under 1 year should be deducted, but these figures are not in the consolidated balance sheet of Rosneft. However, this will not affect the calculation much.
Net Debt / EBITDA = (7 304 – 790 – 485) / 884 = 6.8
And here many questions arise regarding the approaches to assessing the effectiveness of companies. According to official statistics, Rosneft’s net debt amounted to 1.89 trillion rubles, that is, 3 times less. This means that the net debt / EBITDA ratio will be just over 2.2 (that is, within the normal range). On the one hand, you can trust the official statistics and consider derived multipliers based on it. On the other hand, statistics can be manipulated, adjusting it to the desired result. As you can see, in both cases the result is very different. There are questions – ask in the comments.