EV to Assets

EV to Assets Ratio is an important valuation metric used for measuring the value of the company as compared to its total assets and is very helpful in comparing valuations of companies across similar stocks in the sector; Calculated by calculated by dividing enterprise value (Current Market Cap + Debt + Minority Interest + preferred shares – cash) by Total Assets of the company.

EV to Assets Valuation

EV or Enterprise value, divided by Assets, is one of the key valuation ratios in financial parlance, which help measure a company’s worth. There are several other ratios arrived by dividing various financial metrics by EV, and this is perhaps one of the most significant of all these ratios.

We note from above that Amazon and Facebook have EV to Assets of 4.06x and 4.66x, respectively. However, Exxon has a lower EV to Assets of 1.27x.

Like most other financial ratiosFinancial RatiosFinancial ratios are indications of a company's financial performance. There are several forms of financial ratios that indicate the company's results, financial risks, and operational efficiency, such as the liquidity ratio, asset turnover ratio, operating profitability ratios, business risk ratios, financial risk ratio, stability ratios, and so on.read more, EV to Assets to has its own advantages and disadvantages as far as revealing valuable information about the worth of a company is concerned. However, first, it would be essential to define some key concepts before moving on the same.

Gross-Margin-Analysis (main)

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Source: EV to Assets (wallstreetmojo.com)

What is Enterprise Value (EV)?

Enterprise Value Enterprise Value Enterprise Value is a measure of a company's total value that spans the entire market rather than just the equity value. It includes all debt and equity-based ownership claims. This value, which is calculated as the market value of debt + market value of equity - cash and cash equivalents, is particularly relevant when valuing a takeover.read moreis thought of as representative of the actual value of the company, which takes into account both its equity and debt to arrive at a realistic figure of what a company is truly worth. Unlike market capitalization, which looks at equity in isolation, EV helps paint a more realistic picture of the value of a business by adding debt to the figure.

This is why EV is often contrasted against Market Capitalization for their difference in the approach adopted for evaluating a company. EV can also be considered as the ‘takeover price’ of a business, which is why cash and its equivalents are deducted from the total debt to give an idea of net debtNet DebtDebt minus cash and cash equivalents equals net debt, which is the amount of debt a company has in comparison to its liquid assets. It is a metric that is used to evaluate a firm's financial liquidity and aids in determining if the company can meet its obligations by comparing liquid assets to total debt.read more that would need to be paid after the business acquisition.

Enterprise Value Formula = Market Capitalization + Debt + Minority InterestMinority InterestMinority interest is the investors' stakeholding that is less than 50% of the existing shares or the voting rights in the company. The minority shareholders do not have control over the company through their voting rights, thereby having a meagre role in the corporate decision-making.read more + Preferred Shares – Cash and Cash Equivalents

What are Assets?

It would be important here to understand what constitutes the assets of a company in the first place. These include both long-term business assets, such as real estate, and current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more, such as receivables. They can also be defined as core assets, which might have a direct role to play in business operations, and non-core assets, which have a little direct role in business operations. Depending on how assets are defined within a particular context, can the utility of this valuation multiple be measured?

EV to Assets Formula

EV/Assets = Enterprise Value {Market Capitalization + Debt + Minority Interest + Preferred Shares – Cash and Cash Equivalents} Cash And Cash Equivalents} Cash and Cash Equivalents are assets that are short-term and highly liquid investments that can be readily converted into cash and have a low risk of price fluctuation.  Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They are normally found as a line item on the top of the balance sheet asset. read more/ Assets

EV to Assets Examples

Let us look at this below calculation of EV to Assets.

  • Company ABC: Enterprise Value (31 Million) / Assets (22 Million) = 1.409 (EV to Assets)
  • Company XYZ: Enterprise Value (23 Million) / Assets (20 Million) = 1.15 (EV to Assets)

Here it can be seen that the company with lower EV to Assets value, i.e., Company XYZ is a much better choice as compared to Company ABC because of a higher proportion of assets as compared against its enterprise value.

With this, let us look at an example from the Oil & Gas sector.

EV to Assets - Oil & Gas

source: ycharts

We note that EV to Assets of Exxon Mobil, Royal Dutch Shell, and BP are 1.27x, 0.72x, and 0.59x. If we do not consider any other valuation parameter and go only by EV to Assets, then BP is a better choice as it has a higher proportion of Assets when compared to its enterprise value.

Advantages & Disadvantages of EV to Assets Valuation Multiple:

  1. EV to Assets is a key valuation multiple, as we have already discussed above. It is especially useful if the business is asset-driven, and Return On AssetsReturn On AssetsReturn on assets (ROA) is the ratio between net income, representing the amount of financial and operational income a company has, and total average assets. The arithmetic average of total assets a company holds analyses how much returns a company is producing on the total investment made.read more (ROA) is more or less constant. This would also make assets the perfect indicator of Future Cash Flows (FCF).
  2. A high EV to Assets multiple would indicate the business is overvalued in relation to the value of its assets, and if it’s on the lower side, the business is undervalued.
  3. This valuation multiple helps look at an investment from the point of view of its capital structure. Keeping the total value of the capital structure of a business in mind, investors can better understand if the face value is attractively priced to buy its debt if nothing else. This gives a fundamental idea of the value of an investment, especially in asset-driven industries.
  4. Assets are one of the key determinants of the value of a firm, which might be of immense utility in helping understand the actual worth of a business. However, the value of certain types of assets, for instance, intangible assets, can more than often stand on mere assumptions. On the other hand, even fixed assets might be entangled in issues that can affect their actual worth.
  5. It must always be remembered that assets can be defined and categorized in a variety of ways, which can play into this figure and lead to an erroneous impression of what a business might actually be worth in terms of its capital structure.

Conclusion: EV to Assets

It goes without saying that this valuation multiple has its own limitations and drawbacks, but it offers a unique perspective of the company’s worth by taking into account its total assets against its actual worth, as measured by EV or enterprise value. It can be used with a considerable advantage in comparable company analysis as well, which would give a fair idea where a company stands against its peers in terms of its capital structure.

Problems with this metric are pretty obvious to anyone with a practical idea of how assets might be exaggerated on the balance sheets or evaporate in thin air the moment their real worth is to be estimated, as happens all too often with the intangible assetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. read more. Depreciation in the value of assets is another factor along with a plethora of legal and other issues that can even put a question mark on the true worth of fixed assets at times. Keeping its limitations in mind, EV to Assets can be a useful financial metric for anyone willing to invest in a business, along with other enterprise valuation multiples.

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This article has been a guide to EV to Assets, its formula, calculations, advantages, and disadvantages. You may also look at these below valuation articles to enhance your knowledge –

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