Hi Brian, thanks for the video! Per accounting rule, EBIT reflects either 0% or 100% of the subsidiary's performance. Since we use EBIT in DCF analysis, am I correct in the following two cases: 1. A owns 40% of B--> Equity Method: If we run DCF on A, we only get A's standalone Enterprise Value; then after we subtract debt and add cash, we only get A's standalone Equity Value...But the Mkt Cap of A should reflect 100%*A+40%*B; so in this case, do we add 40%*B's equity value after running DCF on A? 2. A owns 80% of B--> Consolidation Method: If we run DCF on A, we get A's standalone Enterprise Value PLUS B's standalone Enterprise Value; then after we subtract debt and add cash, we get A AND B's consolidated Equity Value...But the Mkt Cap of A should only reflect 100%*A+80%*B; so in this case, do we SUBTRACT 20%*B's equity value after running DCF on A? If B is public, it's not that hard to do all these adjustments. But what if B is private? Thanks a lot!
In #1, yes, you need to add the value of the Equity Investments at the end, along with cash. If B is public, yes, it is 40% * Equity Value of B. If B is private, you use the book value of the Equity Investment on A's Balance Sheet. In #2, you subtract the value of the Noncontrolling Interests at the end. If B is public, this is 20% * Equity Value of B. If B is private, you use the book value of the Noncontrolling Interest on A's Balance Sheet. If A does not list any of this information, give up and pick a different company... or go and hire a team of ninja assassins to get it out of their management team, if you know a good team of ninjas.
Mergers & Inquisitions / Breaking Into Wall Street Haha, thanks a lot! Folks with a ninja background seem to have an advantage when it comes to breaking into banking lol.
Re. you last comment. Can I really use the book value of the NCI in the parents' balance sheet es an estimate for the NCI's market value? The NCI book value is only the partial net income of the not wholly owned subsidiary. For an estimation of the equity value i need to use the (disclosed) net income of the subsidiary times an P/E multiple - or not?!
Hi Brian, Thank you for those videos. On a similar topic, what net income (all or only attribuable to parent company) would you take when calculating PE ratio? I imagine listed equity value only measures the parent's companie EqV so we should only take the net income attrubuable to parent co but would love your view as I might have misundertood.
It should be Net Income Attributable to Parent Company at the very bottom of the IS after the NCI Net Income deduction and the Equity Investment Net Income addition (if it exists).
Hey Brian, great video, just one questions... You said that if owning a majority stake in another company you would consolidate the BS, CFS and IS. So both sides of the balance sheet will balance, but when you subtract non controlling interest at the bottom of your IS which flows into your retained earnings, which in your example, is down by $2, what other item is affected so that your balance sheet balances? Is the other item the non controlling interest that is added into your shareholders equity section on the BS? Thanks!
Retained Earnings goes down and Noncontrolling Interests goes up because Net Income Attributable to NCI is subtracted to calculate Net Income to Common at the bottom of the IS or top of the CFS, and then you reverse Net Income Attributable to NCI on the CFS. Net Income to Common flows into Retained Earnings, and Net Income Attributable to NCI flows into Noncontrolling Interests.
Great video about NCI Brian. If the company (namely, Tesla) differentiates between "Redeemable NCI" and straight "NCI" in its Balance Sheet, do we just add both of these together to get to EV? Thanks in advance for reading and answering the comments even after years of posting the video.
You could, but if you do so, then you need to exclude the shares or units that correspond to the Redeemable NCI (search the filings). The other option is to count all the shares toward Equity Value, but then only add NCI but not Redeemable NCI when calculating Enterprise Value.
@@financialmodeling So you wouldn't add Redeemable NCI to get to Enterprise Value because you expect that to be paid out of the normal operations of the firm as opposed to be paid by the acquirer, right?
It's because the units represented by the Redeemable NCI should already be counted toward Equity Value... you would be double counting if you added it again.
@@financialmodeling Hi Brian, thanks for the clear explanation. Been thinking before re-asking and I think I now understand your answer. When you say "the units represented by the Redeemable NCI should already be counted toward Equity Value", what you mean is that the Diluted Equity Value from which we proceed to calculate EV should already contain the additional shares expected due to de "redeemable" feature of this portion of NCI? Thanks a million times for making these things understandable.
Thx for sharing. Quick question, how can we get the fair value of the noncontrolling or equity investment, because to me, it seems like all we have is the book value? Doesn't make sense to add or subtract book value to/from market cap.
thank you very helpful.. but I want to ask you something what if I am comparing enterprise value with free cash flow.. should I add minority interest in the EV or not.
+Akash Kedare If you have excluded NCI from FCF, you should add it when calculating Enterprise Value. If you have included NCI in FCF, you should leave it out when calculating Enterprise Value.
@@financialmodeling If you have excluded NCI from FCF it means your FCF shows say 70% of the full figure (assuming 70% ownership). In this case wouldn't you leave the NCI for the EV figure so that both EV and FCF reflect the 70% ownership?
@@oxy204 You need to make sure that both the FCF and the Enterprise Value include the same percentage contribution from the partially owned company. The problem with these questions is that people use "NCI" to mean different things - the portion of the Sub Co that Parent Co *does* own, the portion that it does *not* own, and sometimes the entire Sub Co, which means that answers are ambiguous or confusing unless you specify exactly what you mean. The easiest solution is to make both Enterprise Value and Unlevered Free Cash Flow include 100% of Sub Co's value and UFCF by not adding or subtracting any NCI-related line item, so that UFCF for the Parent starts with Operating Income (which includes Parent Co Operating Income and 100% of Sub Co's Operating Income).
@@financialmodeling Perfect Thank you! Therefore by taking 100% of the UFCF through operating income we would need to include (add) the missing NCI in Equity Value? Thank you so much for your reply
@@oxy204 Yes, but you always do that when calculating Enterprise Value... and you always pair UFCF with Enterprise Value since they're both capital structure-neutral. So this is nothing new/different.
As always, loved your vid! One thing though, I don't think anyone minds spending longer on your videos so can you please slow down a bit? :D It gets confusing real fast and you have to stop and rewind and spend even more time.
We have a feature on our site where you can adjust the play speed - TH-cam does not allow for that unfortunately. To be honest, most people looking at earlier / older videos said, "You're moving too slowly, HURRY UP" so the newer lessons move at a much faster pace in response to that. But you can adjust that speed if you have signed up for the courses and have access to the lessons on our site.
This is just an example for this video. It's not based on a real company. In real life, we would have to look in the company's filings to get this value.
Thanks for your feedback. We don't make the Excel files available for every video, but you can find everything inside the Fundamentals course on our site and/or the bonus case studies there.
Brian,assuming I have the market value of my minority interest (e.g. publically traded due to spin-off), I would take the market value instead of book value?Best,Hugo
Dear Brian, Thanks for your videos. I have a small question regarding the "actual" EV of a company. It looks like your calculated EV is basically for "apples-to-apples" comparison purpose right? As for Non-controlling Interest video, EV reflects 100% of parent's major-owned enterprise while for Equity Investments video, EV reflects 0% of parent's owned enterprise. So I think your calculated EVs are used to calculate multiples correctly. If I would like to see the "actual" EV, what I need to do is looking at unadjusted EV where EV reflects the actual stake that parent company is holding. Is that a right approach?
+Dieu Minh Tran If you go by the official definition of Enterprise Value (the value of core business operating assets, but to all investors in the company), you should add Non-Controlling Interests to capture all the investors in the company... the partially owned other company could be counted as another investor group. But some people don't buy into that logic, so you could do it your way as well and make Enterprise Value just reflect the actual stake the parent owns. HOWEVER, this is quite difficult in practice because you then have to separate out the revenue, expenses, etc. from this other, partially-owned company, and hardly anyone discloses enough information to do that. You'd need the other company's entire financial statements to do it, really. So it's a nice idea in theory, but in practice it's probably not practical to do that.
"Value of the Other Company" refers to the other company's Equity Value because we are assuming the parent company's investment is in the other company's common shares, not its entire capital structure.
Thanks a lot, quick question: The method you are presenting is not giving the "real" value or multiplies because the parent company doesn't actually owns 100% of the other company, so I would appreciate if you could make a clarification on what are we actually getting out of these adjustments if we understand that they are not 100% "real"?
That is incorrect. The Noncontrolling Interest counts as "another investor group" because the parent owns above 50% of that company and can draw on its resources as necessary. So these multiples are "real" and do represent the entire parent company and subsidiary.
Hi Brian, thanks for the video!
Per accounting rule, EBIT reflects either 0% or 100% of the subsidiary's performance. Since we use EBIT in DCF analysis, am I correct in the following two cases:
1. A owns 40% of B--> Equity Method:
If we run DCF on A, we only get A's standalone Enterprise Value; then after we subtract debt and add cash, we only get A's standalone Equity Value...But the Mkt Cap of A should reflect 100%*A+40%*B; so in this case, do we add 40%*B's equity value after running DCF on A?
2. A owns 80% of B--> Consolidation Method:
If we run DCF on A, we get A's standalone Enterprise Value PLUS B's standalone Enterprise Value; then after we subtract debt and add cash, we get A AND B's consolidated Equity Value...But the Mkt Cap of A should only reflect 100%*A+80%*B; so in this case, do we SUBTRACT 20%*B's equity value after running DCF on A?
If B is public, it's not that hard to do all these adjustments. But what if B is private?
Thanks a lot!
In #1, yes, you need to add the value of the Equity Investments at the end, along with cash. If B is public, yes, it is 40% * Equity Value of B. If B is private, you use the book value of the Equity Investment on A's Balance Sheet.
In #2, you subtract the value of the Noncontrolling Interests at the end. If B is public, this is 20% * Equity Value of B. If B is private, you use the book value of the Noncontrolling Interest on A's Balance Sheet.
If A does not list any of this information, give up and pick a different company... or go and hire a team of ninja assassins to get it out of their management team, if you know a good team of ninjas.
Mergers & Inquisitions / Breaking Into Wall Street Haha, thanks a lot! Folks with a ninja background seem to have an advantage when it comes to breaking into banking lol.
Re. you last comment. Can I really use the book value of the NCI in the parents' balance sheet es an estimate for the NCI's market value? The NCI book value is only the partial net income of the not wholly owned subsidiary. For an estimation of the equity value i need to use the (disclosed) net income of the subsidiary times an P/E multiple - or not?!
Hi Brian,
Thank you for those videos. On a similar topic, what net income (all or only attribuable to parent company) would you take when calculating PE ratio? I imagine listed equity value only measures the parent's companie EqV so we should only take the net income attrubuable to parent co but would love your view as I might have misundertood.
It should be Net Income Attributable to Parent Company at the very bottom of the IS after the NCI Net Income deduction and the Equity Investment Net Income addition (if it exists).
Great video !!!
Thanks for watching!
Hey Brian, great video, just one questions...
You said that if owning a majority stake in another company you would consolidate the BS, CFS and IS. So both sides of the balance sheet will balance, but when you subtract non controlling interest at the bottom of your IS which flows into your retained earnings, which in your example, is down by $2, what other item is affected so that your balance sheet balances? Is the other item the non controlling interest that is added into your shareholders equity section on the BS?
Thanks!
Retained Earnings goes down and Noncontrolling Interests goes up because Net Income Attributable to NCI is subtracted to calculate Net Income to Common at the bottom of the IS or top of the CFS, and then you reverse Net Income Attributable to NCI on the CFS. Net Income to Common flows into Retained Earnings, and Net Income Attributable to NCI flows into Noncontrolling Interests.
Great video about NCI Brian.
If the company (namely, Tesla) differentiates between "Redeemable NCI" and straight "NCI" in its Balance Sheet, do we just add both of these together to get to EV?
Thanks in advance for reading and answering the comments even after years of posting the video.
You could, but if you do so, then you need to exclude the shares or units that correspond to the Redeemable NCI (search the filings). The other option is to count all the shares toward Equity Value, but then only add NCI but not Redeemable NCI when calculating Enterprise Value.
@@financialmodeling So you wouldn't add Redeemable NCI to get to Enterprise Value because you expect that to be paid out of the normal operations of the firm as opposed to be paid by the acquirer, right?
It's because the units represented by the Redeemable NCI should already be counted toward Equity Value... you would be double counting if you added it again.
@@financialmodeling Hi Brian, thanks for the clear explanation. Been thinking before re-asking and I think I now understand your answer. When you say "the units represented by the Redeemable NCI should already be counted toward Equity Value", what you mean is that the Diluted Equity Value from which we proceed to calculate EV should already contain the additional shares expected due to de "redeemable" feature of this portion of NCI? Thanks a million times for making these things understandable.
@@sszoltan Yes
Thx for sharing. Quick question, how can we get the fair value of the noncontrolling or equity investment, because to me, it seems like all we have is the book value? Doesn't make sense to add or subtract book value to/from market cap.
You can get it if the parent company discloses the fair market value or the NCI is for a public company. Otherwise, no.
thank you very helpful..
but I want to ask you something what if I am comparing enterprise value with free cash flow.. should I add minority interest in the EV or not.
+Akash Kedare If you have excluded NCI from FCF, you should add it when calculating Enterprise Value. If you have included NCI in FCF, you should leave it out when calculating Enterprise Value.
@@financialmodeling If you have excluded NCI from FCF it means your FCF shows say 70% of the full figure (assuming 70% ownership). In this case wouldn't you leave the NCI for the EV figure so that both EV and FCF reflect the 70% ownership?
@@oxy204 You need to make sure that both the FCF and the Enterprise Value include the same percentage contribution from the partially owned company. The problem with these questions is that people use "NCI" to mean different things - the portion of the Sub Co that Parent Co *does* own, the portion that it does *not* own, and sometimes the entire Sub Co, which means that answers are ambiguous or confusing unless you specify exactly what you mean. The easiest solution is to make both Enterprise Value and Unlevered Free Cash Flow include 100% of Sub Co's value and UFCF by not adding or subtracting any NCI-related line item, so that UFCF for the Parent starts with Operating Income (which includes Parent Co Operating Income and 100% of Sub Co's Operating Income).
@@financialmodeling Perfect Thank you! Therefore by taking 100% of the UFCF through operating income we would need to include (add) the missing NCI in Equity Value? Thank you so much for your reply
@@oxy204 Yes, but you always do that when calculating Enterprise Value... and you always pair UFCF with Enterprise Value since they're both capital structure-neutral. So this is nothing new/different.
As always, loved your vid! One thing though, I don't think anyone minds spending longer on your videos so can you please slow down a bit? :D It gets confusing real fast and you have to stop and rewind and spend even more time.
We have a feature on our site where you can adjust the play speed - TH-cam does not allow for that unfortunately.
To be honest, most people looking at earlier / older videos said, "You're moving too slowly, HURRY UP" so the newer lessons move at a much faster pace in response to that. But you can adjust that speed if you have signed up for the courses and have access to the lessons on our site.
How did you derive the 100 as the value of the other company
This is just an example for this video. It's not based on a real company. In real life, we would have to look in the company's filings to get this value.
No Excel available yet?:-( Absolutely brilliant videos btw!
Thanks for your feedback. We don't make the Excel files available for every video, but you can find everything inside the Fundamentals course on our site and/or the bonus case studies there.
Brian,assuming I have the market value of my minority interest (e.g. publically traded due to spin-off), I would take the market value instead of book value?Best,Hugo
Yes
Dear Brian,
Thanks for your videos. I have a small question regarding the "actual" EV of a company. It looks like your calculated EV is basically for "apples-to-apples" comparison purpose right? As for Non-controlling Interest video, EV reflects 100% of parent's major-owned enterprise while for Equity Investments video, EV reflects 0% of parent's owned enterprise. So I think your calculated EVs are used to calculate multiples correctly. If I would like to see the "actual" EV, what I need to do is looking at unadjusted EV where EV reflects the actual stake that parent company is holding. Is that a right approach?
+Dieu Minh Tran If you go by the official definition of Enterprise Value (the value of core business operating assets, but to all investors in the company), you should add Non-Controlling Interests to capture all the investors in the company... the partially owned other company could be counted as another investor group. But some people don't buy into that logic, so you could do it your way as well and make Enterprise Value just reflect the actual stake the parent owns.
HOWEVER, this is quite difficult in practice because you then have to separate out the revenue, expenses, etc. from this other, partially-owned company, and hardly anyone discloses enough information to do that. You'd need the other company's entire financial statements to do it, really.
So it's a nice idea in theory, but in practice it's probably not practical to do that.
I got it right now. Thank you very much for your detailed explanation. And again, all of your videos are fantastic.
When you say value of the other company is this the equity value or the enterprise value and why?
"Value of the Other Company" refers to the other company's Equity Value because we are assuming the parent company's investment is in the other company's common shares, not its entire capital structure.
Why is it call "Noncontrolling" if you have more than 50% of the company?
Because it corresponds to the part of the Sub Co that the Parent Co does *not* own and therefore does *not* control.
@@financialmodeling Thank you very much!
Thanks a lot, quick question: The method you are presenting is not giving the "real" value or multiplies because the parent company doesn't actually owns 100% of the other company, so I would appreciate if you could make a clarification on what are we actually getting out of these adjustments if we understand that they are not 100% "real"?
That is incorrect. The Noncontrolling Interest counts as "another investor group" because the parent owns above 50% of that company and can draw on its resources as necessary. So these multiples are "real" and do represent the entire parent company and subsidiary.
No Excel file this time? :'(
Sorry, not available yet - we may post it in one of the courses on the site in the future.