One of my favourite metrics for finding undervalued shares on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO), is the Enterprise Multiple (EM).
The EM heavily favours companies with lots of cash compared to their debt and these are the types of companies I really like. The EM looks at companies through the eyes of a potential acquirer.
The EM uses Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) in the calculation which makes it easier to compare across companies, industries and sectors. EBITDA excludes special items that a company does not expect to recur in future years and ensures that earnings are only specific to operations.
To calculate EM you simply:
- Start with the company’s market capitalisation
- Add total debt (long and short-term debt)
- Subtract cash and cash equivalents
This gives you the Enterprise Value (EV) which you divide by the company’s EBITDA and you have your Enterprise Multiple.
Today, I’ve compiled a list of 23 shares and their enterprise multiples, looking for the most undervalued share on the ASX200. I’ve deliberately excluded financials, A-REITS, and utilities from this analysis.
To demonstrate how I reached the Enterprise Multiple in the table below, let’s use Rio Tinto Limited (ASX: RIO) from the list as a real-life example:
- Rio has a market capitalisation of $17.1 billion
- Short term debt of $2.4 billion debt
- Long term debt of $21.1 billion
- Cash and cash equivalents of $9.3 billion
To calculate the EM, we start with the market cap $17.1 billion, add the total debt of $23.6 billion, subtract cash of $9.3 billion, and we end up with an EV of $31.4 billion. Then we divide the EV ($31.4 billion) by the company’s EBITDA ($12.3 billion) and we get an EM of 2.54. The lower the multiple the better the value.
Here’s the list (All amounts are in millions, except for the EM):
|Company||Cash ($m)||ST Debt ($m)||LT Debt ($m)||Net Debt ($m)||Market Cap ($m)||Enterprice Value ($m)||EBITDA
|OZ Minerals Limited (ASX: OZL)||552||(552)||1,360||808||479||1.69|
|Rio Tinto Limited (ASX: RIO)||9,366||2,484||21,140||14,258||17,170||31,428||12,370||2.54|
|BHP Billiton Limited (ASX: BHP)||6,753||3,201||27,969||24,417||48,460||72,877||20,440||3.57|
|Qantas Airways Limited (ASX: QAN)||2,908||771||4,791||2,654||7,880||10,534||2,160||4.88|
|Woodside Petroleum Limited (ASX: WPL)||155||1,065||2,906||3,816||21,920||25,736||4,550||5.66|
|Flight Centre Travel Group Ltd (ASX: FLT)||1,377||32||(1,345)||3,760||2,415||417||5.79|
|Cimic Group Ltd (ASX: CIM)||2,349||610||1,384||(355)||8,800||8,445||1,430||5.91|
|Woolworths Limited (ASX: WOW)||1,333||1,645||3,079||3,391||28,180||31,571||4,800||6.58|
|Aurizon Holdings Ltd (ASX: AZJ)||171||59||2,924||2,812||8,060||10,872||1,480||7.35|
|Telstra Corporation Ltd (ASX: TLS)||1,396||1,496||14,138||14,238||68,100||82,338||9,660||8.52|
|Oil Search Limited (ASX: OSH)||842||202||4,157||3,517||10,140||13,657||1,380||9.90|
|Newcrest Mining Limited (ASX: NCM)||258||4,019||3,761||12,490||16,251||1,570||10.35|
|Asciano Ltd (ASX: AIO)||127||3,649||3,522||8,630||12,152||1,050||11.57|
|Wesfarmers Ltd (ASX: WES)||711||1,913||4,615||5,817||47,780||53,597||4,510||11.88|
|Brambles Limited (ASX: BXB)||166||127||2,727||2,688||16,110||18,798||1,560||12.05|
|Amcor Limited (ASX: AMC)||704||1,012||2,572||2,880||14,160||17,040||1,360||12.53|
|Crown Resorts Ltd (ASX: CWN)||340||188||2,473||2,321||8,170||10,491||795||13.20|
|Ramsay Health Care Limited (ASX: RHC)||315||425||2,724||2,834||11,450||14,284||1,050||13.60|
|Caltex Australia Limited (ASX: CTX)||19||40||693||714||9,620||10,334||587||17.60|
|Sydney Airport Holdings Ltd (ASX: SYD)||526||474||6,983||6,931||14,220||21,151||977||21.65|
|ResMed Inc. (CHESS) (ASX: RMD)||658||1||400||(257)||11,260||11,003||493||22.32|
|Transurban Group (ASX: TCL)||1,889||616||11,593||10,320||21,790||32,110||1,300||24.70|
|CSL Limited (ASX: CSL)||556||3||2,277||1,724||47,810||49,534||1,920||25.80|
(Source: Company Reports)