Should you ignore intangible amortisation? – AstraZeneca

Like many companies, AstraZeneca excludes intangible asset amortisation from its adjusted performance metrics. The stock currently trades at a price earnings ratio of 23x based on ‘core’ 2018 earnings, but without the add back the PE would be about 37x. Is the add back justified? And if so do companies add back the right amount?

The intangible amortisation problem in equity analysis arises from the inconsistency between the accounting for purchased and self-developed intangible assets. We argue that the accounting treatment of subsequent expenditure, either capitalised or expensed, determines the appropriate adjustment to reported earnings.

Continue reading “Should you ignore intangible amortisation? – AstraZeneca”

EV/EBITDA multiples must be consistent – Novartis

Swiss pharma company Novartis provides investors with its own calculation of an EV/EBITDA multiple. However, in our view, the EV is inconsistent with EBITDA. We review the company’s calculation and suggest amendments to ensure it better captures the value of Novartis’ core business.

To derive useful valuation multiples, you must be consistent. Our main adjustment to the Novartis calculation relates to the value of their stake in fellow Swiss pharma company Roche.

Continue reading “EV/EBITDA multiples must be consistent – Novartis”

Price earnings ratios – DCF in disguise

Are you trying to identify what is ‘priced in’ to a current stock price or work out a terminal value in a DCF analysis? A target valuation multiple calculation may be the answer. We present a simple interactive model.

Many dismiss valuation multiples as being too simplistic; however, multiples are just DCF in disguise. You can derive a price earnings ratio with the same value drivers as you would use in a discounted equity cash flow model.

Continue reading “Price earnings ratios – DCF in disguise”

Enterprise value – calculation and mis-calculation

Valuation methods based on enterprise value have become the benchmark in equity valuation. Most of you will have analysed equity investments using valuation multiples based on enterprise value or used absolute valuation methods to derive an enterprise value.  

In simplistic terms enterprise value is market capitalisation plus net debt; but is that good enough? In many situations we think not.  We review the key building blocks of enterprise value to assist you in deriving relevant valuation metrics.

Continue reading “Enterprise value – calculation and mis-calculation”