Return on Enterprise Value (ROEV) – Best Stock Valuation Calculation

Return on Enterprise Value (ROEV) – Best Stock Valuation Calculation

stock market tips

Enterprise Value

Return on Enterprise value (ROEV) is a stock valuation formula used in value investing strategies. Combining enterprise value and net cash flow into a ratio provides a powerful tool for investment analysis.

Return on Enterprise Value

Return on Enterprise Value (ROEV) is net cash flow divided by enterprise value. I believe it is the single most valuable stock valuation calculation in the investment universe. An investor should never make investment decisions based on a single calculation, but if I could only use one stock valuation formula it would be ROEV.

Stock Valuation Calculation

Net Cash Flow (NCF) divided by Enterprise Value (EV) = Return on Enterprise Value (ROEV)

Use Net Cash Flow as the numerator and Enterprise Value as the denominator to calculate the Return on Enterprise Value.


Compare and Value Company Shares

Enterprise value provides the most valuable business valuation metric. One of the advantages of enterprise value is that it equalises companies with different capital structures by making adjustments for debt and cash. This provides equality for comparing the performance of companies with very different balance sheets. By adjusting for debt and cash, enterprise value provides the total value of a company as if you were purchasing the whole business at the current market value.

Net cash flow provides the most important financial income metric: How much cash is generated from operations. Profits can be deceiving due to accounting entries. Cash flow is real and is hard to manipulate.

Combining cash flow and enterprise value as a ratio produces Return On Enterprise Value. ROEV provides the analyst the rate of return on the total value of the business (EV). In other words it measures, as a percentage, the real amount of money (cash flow) being produced today (not accounting profits) based on what the business is valued at today (not book value).

What do you think of Return on Enterprise Value as a value investing strategy?

 

ABOUT AUTHOR

Niveza Editorial Desk : We are a team of stock market nerds trying to stay ahead of the herd. We spend our grey cells everyday to a pave a smooth road for our clients in the shaky world of stock market. While tracking the mood swings of the market we bring our clients the most rewarding deals.

LEAVE A COMMENT

RECOMMENDED READING

Portfolio Management Service: Outsource Your Investment Worries

The stock advisory service is the best option for you if you want to invest in stock market but don't have adequate knowledge of it. An advisory firm gives you the much-needed hand holding to take the right decisions. Their research reports an
Read More>>

Stock Advisor: For High Growth & Better Risk Management

Stock investment is messy. Yes, there is a big growth potential but if you are doing it on your own and you don't have the experience of fundamental analysis, it can be an uphill task. That is one of the reasons why most of the investors who u
Read More>>

Rupee Tumbles To A New Low; Market Expected To Consolidate

Our Analysis This week, the market consolidated between 11,300 to 11,500 due to lack of positive triggers & consolidation in heavyweights like HDFC, HDFC Bank, Reliance. Indian Rupee de
Read More>>

Free Share Market Tips Today: Stop & Read Before You Invest In Stocks

Various popular stock market news portals and TV channels discuss trending stocks and provide free share market tips based on technical charts and often without in-depth research. Our research desk analyses these trending stock market tips and pro
Read More>>

Value Investing: The Road To Value Picks & Undervalued Stocks

You must have heard many times that Warren Buffett is a value investor. In the Indian context, even Rakesh Jhunjhunwala is referred to as a value investor. It does tell us that these are smart investors but what exactly does value investing me
Read More>>