4.02 Influences on the value of an enterprise – earnings

With an understanding of the basics of the capitalized cashflows valuation method, a business owner will have several clues regarding the main influences on enterprise value. This article looks briefly at the way the components of the business’s income statement and cashflow statement influence its value. In valuation terms, this could be considered the “top-line” issue.

Remember, the value of an enterprise can be reduced to a single equation: Value = Opportunity / Risk

All else being equal, the higher the sustainable cashflows of the business, the higher its value.

It is self-evident that, all other things being equal, the higher the sustainable cashflows of the business, the higher its value. The main issues that influence the cashflows are:

• Sales revenue, which is due in large part to the success of the sales department in the business
• Gross profit, which is due to the ability of the business to keep its cost of sales efficient
• Overhead expenses, which should be minimized without prejudice to business operations
• Taxes, over which the business has limited control
• Sustaining capital expenditures, which comes down to finding the optimum formula for the use of capital assets (i.e. replace regularly at just about the time the assets start to lose efficiency).

Contact MVI to discuss the influence of earnings and risks faced by your business on its enterprise value.