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A quick read on a company's worth.

Evaluating a company's enterprise value is an occupation for a lot of valuation consultants. But H. Lee Rust, a corporate finance consultant and author, contends that a rough estimate of market or enterprise value can be done quickly and simply.

Start with the last three year's income statements, Rust says. If sales and profits have been relatively stable, compute the average over that period for your net profits before annual interest, taxes, depreciation and amortization charges (EBITDA). If sales and profits have grown markedly, use the most recent year, not an average.

Multiply the EBITDA--which Rust calls "the nominal cash flow of the business"--by a factor between 3.5 and 6.5, he says. That number will vary, depending on competition and market leadership. If your company is in a highly competitive industry and you have relatively low levels of proprietary content, the multiplier will be on the low side. Conversely, with less competition and more proprietary content, such as patents, the multiplier would be on the high end.

After deciding on the multiplier and applying it to EBITDA, subtract all interest-bearing debts, Rust says. (The assumed debts are as much a part of the purchase price or enterprise value as the debt raised independently to pay the cash portion of the purchase price, he argues.) The resulting calculation should be close to the market or enterprise value.
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Title Annotation:valuation
Author:Heffes, Ellen M.
Publication:Financial Executive
Article Type:Brief article
Geographic Code:1USA
Date:Sep 1, 2006
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