Hi everyone, as we discussed there are several common and widely used simple or basic valuation models. Such as Price to Earnings, Price to Book, Price to Sales and Enterprise Value to EBITDA Multiple. Throughout this video will focus on the enterprise value to EBITDA Multiple model. This model is widely used by investors and analysts for mature companies who have a track record of generating positive EBITDA. We'll use six steps to calculate our target company's valuation. One identify peer companies for your target firm. Calculate the equity value for each peer company(current share price x shares outstanding). Note, the current share price and shares outstanding can be obtained from Yahoo finance. Next, add net debt, which is total debt less cash obtained from the company's balance sheet to calculate the enterprise value. Next, calculate the average enterprise value to EBITDA multiple for the peer companies. Then apply the EV/EBITDA multiple to your company to calculate their enterprise value and finally, calculate the equity value per share. For example, we'll go through each of the 6 steps to execute the EV/EBITDA valuation model. And step one I've selected Walmart as our target company and choose Target and Costco as peer companies. Walmart operates in the retail industry with a combination of brick and mortar stores and online sales. Target and Costco have similar go to market approaches and also operate in the retail industry. As such, I believe they are relevant peers. And step two, we obtained the applicable data for Target and Costco to calculate their equity market value. For simplicity, you can log into Yahoo Finance to obtain their current share price and shares outstanding. Alternatively, you can also access the number of shares outstanding using each company's 10k. For this example, I calculated the equity market value of both companies by multiplying their share price by shares outstanding, to calculate a market value for target of 114 billion, and Costco of 168 billion. And step 3, we obtain total debt outstanding and cash balance from each company's balance sheet and their 10k to calculate their net debt balances. Net debt is calculated as total debt minus cash. Target has a total debt balance of 12.7 billion and a cash balance of 8.5 billion, leaving a net debt balance of 4.2 billion. Costco has a total debt balance of 7.6 billion and a cash balance of 12.3 billion, resulting in a net debt balance of -4.7 billion. Next week calculate each firm's enterprise value. And as a reminder, enterprise value or the value of the firm, equals the market value of debt plus the market value of equity. Targets enterprise value equals 118.2 billion, while Costco's enterprise value equals 163.5 billion. And step four, we calculate the EV/EBITDA multiple for the peer companies by dividing the enterprise value by EBITDA. As a reminder, EBITDA is calculated as earnings before interest taxes, depreciation and amortization. Earnings before interest in taxes is obtained from the income statement and depreciation and amortization is found on the statement of cash flows within each company's 10k. Targets EV/EBITDA ratio is 13.1 times. Costco's EV/EBITDA ratio is 22.8 times. We can calculate the simple average for the two peer companies to equal 17.4 times. And step five, we apply the EV/EBITDA pure multiple to Walmart to calculate their enterprise value. We use the EV/EBITDA on average for the beer companies and multiply by Walmart's EBITDA. Note, Walmart's historical EBITDA can be calculated from their income statement and cash flow is reported in their 10k. Alternatively, their forecasts the EBITDA can be found in Yahoo Finance. In order to calculate Walmart's equity value per share using the EV/EBITDA model, we multiply Walmart's EBITDA of $33.7b by the comparable EV/EBITDA peer multiple of 17.4 times. This means that Walmart's estimated enterprise value equals $586 billion. And finally in Step six, we need to perform an extra step to calculate Walmart's equity value. Within the EV/EBITDA model, we used a total company performance metric or EBITDA. As such the output was enterprise value. Therefore, we need to subtract the value of debt from the enterprise value to calculate the equity value per share. Walmart's enterprise value of 586.2 billion less net debt balance of 44.3 billion equals an equity value of $541.9 billion. This amount is divided by shares outstanding to calculate Walmart's intrinsic equity value per share of $190.34 cents. If we compare our calculated equity value per share for Walmart, using the EV/EBITDA model versus the current share price as of June the 17th, 2021, you'll notice that this approach indicates that Walmart is under valued. It's important to note that investors should not overreact based upon this simplistic analysis. It should be used as one of many data points when making investment decisions. As we previously discussed, there are several valuation models used extensively by Finance professionals, investors and analyst. Simply put, there's not a one size fits all approach. In order to determine which one is right for your company, there are several factors that need to be considered such as, what are the critical assumptions needed for the model? And is this data available for your company? What's most commonly used in your industry or sector and what's the life cycle of your company? Using the four basic simple valuation models we reviewed, our estimated share price for Walmart ranged from $117.89 per share to $243.03 per share. Again, there's not a one size fits all approach. You need to evaluate the facts and circumstances of each case to determine which model is appropriate for your purposes.
