Key Value Drivers 

 Enterprise Value (EV) is the total value of a business enterprise to its investors. It's the sum of discounted future cash flows investors expect to receive in the future. Higher valuation always results from the combined forces of four key value drivers:
  • Higher ROIC (Return on Invested Capital)
    • In other words, high ROIC comes from high profit margin or high capital turnover (i.e., low capital investment requirement)
  • Low required return by investors, i.e., low WACC (Weighted Average Cost of Capital), as a result of:
    • A more steady profit stream
    • Lower fixed costs, leading to more financial and operating flexibility 
  • High future growth opportunities
    • Hard to sustain long-term growth rates above global GDP
    • Valuable only if ROIC>WACC
    • When ROIC = WACC, future growth neither creates or destroys value, and thus is value-neutral
    • Enterprise Value = NOPAT / WACC + PVGO (Present Value of Growth Opportunities)
  • Wide "Economic Moat"
    • Barriers that prevent market competitive forces from reverting ROIC toward WACC, usually created by:
      • Economies of scale
      • Customer captivity: networking effect, customer habit, etc
      • Production cost advantage
    • Economic moats add value via two channels:
      • Lengthening the Competitive Advantage Period (CAP), during which a company earns excess ROIC over its WACC
      • Reducing risks and accordingly the investor's required return
In other words, investors are willing to pay more for a business with higher investment profitability, lower risk, higher growth opportunities, and wide economic moats.


  • Return on Invested Capital (ROIC)
    • ROI (Return on Investment), ROC (Return on Investment), ROCE (Return on Capital Employed), ROR (Rate of Return)
    • Branded versions: Cash Flow Return on Investment (CFROI, Credit Suisse/HOLT), Cash Return on Capital Invested (CROCI, Deutsche Bank), Economic Profitability of Invested Capital (EPIC, UBS), Economic Margin (Applied Financial Group), Cash Economic Return (LifeCycle Returns)
  • Cost of Capital
    • Discount Rate, Weighted Average Cost of Capital (WACC), Cost of Equity, Cost of Debt
    • Hurdle rate, opportunity cost, capital charge
  • Economic Value Added = (ROIC -- WACC) x IC
    • EVA (Stern Stewart & Co.), Economic Profit, Shareholder Value Added, Risk-Adjusted Return on Capital (RAROC)
    • Market Value Added (MVA): the spread between Enterprise Value and current Invested Capital
    • Net Operating Profit After Taxes, NOPLAT
    • FCFF (Free Cash Flow to the Firm) = NOPAT -- Incremental Capex and working capital investment
  • EBIT
    • Earnings Before Interests and Taxes, (Net) Operating Income, (Net) Operating Profit/Loss
    • EBITA = Earnings Before Interests, Taxes, and Amortizations
    • EBITDA = Earnings Before Interests, Taxes, Depreciation, and Amortizations
      • Gross operating cash flow (to the firm)
  • Systematic risk
    • Market risk, undiversifiable risk
  • Idiosyncratic risk
    • Business risk, firm-specific risk, diversifiable risk
  • Capital structure
    • Financing mix, financial leverage, debt-to-equity ratio
    • Recap = Recapitalization: change in capital structure, more often toward a higher financial leverage
  • Tax shield
  • Pro Forma
    • Forecast, projection, expectation, extrapolation
  • Income Statement
    • Profit/Loss (P&L) Statement, Statement of Operation, Statement of Financial Performance, Earnings Statement, Statement of Comprehensive Income
  • Balance Sheet Statement
    • Statement of Financial Condition, Statement of Financial Position, Asset and Liability Statement


Rocco Huang,
Jun 8, 2011, 2:16 PM
Rocco Huang,
Jun 8, 2011, 2:16 PM