[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.00,0:00:00.44,Default,,0000,0000,0000,,
Dialogue: 0,0:00:00.44,0:00:03.37,Default,,0000,0000,0000,,In the last couple of videos\Nwe saw that looking just
Dialogue: 0,0:00:03.37,0:00:06.80,Default,,0000,0000,0000,,purely at market capitalization\Ncan be a little
Dialogue: 0,0:00:06.80,0:00:09.19,Default,,0000,0000,0000,,bit misleading, when you look at\Ncompanies that have a good
Dialogue: 0,0:00:09.19,0:00:11.38,Default,,0000,0000,0000,,bit of leverage or companies\Nthat have a good bit of debt.
Dialogue: 0,0:00:11.38,0:00:14.53,Default,,0000,0000,0000,,For example, if that's the\Nassets of the company, and
Dialogue: 0,0:00:14.53,0:00:18.18,Default,,0000,0000,0000,,let's say that they have\Nthis much debt.
Dialogue: 0,0:00:18.18,0:00:19.81,Default,,0000,0000,0000,,And this is their equity.
Dialogue: 0,0:00:19.81,0:00:24.43,Default,,0000,0000,0000,,
Dialogue: 0,0:00:24.43,0:00:26.18,Default,,0000,0000,0000,,And then let's say they\Nhave some excess cash.
Dialogue: 0,0:00:26.18,0:00:28.42,Default,,0000,0000,0000,,Cash that's not necessary to\Nactually operate the business.
Dialogue: 0,0:00:28.42,0:00:30.15,Default,,0000,0000,0000,,I'll draw that up here.
Dialogue: 0,0:00:30.15,0:00:31.52,Default,,0000,0000,0000,,So this is excess cash.
Dialogue: 0,0:00:31.52,0:00:34.85,Default,,0000,0000,0000,,Some cash is necessary, and\Noftentimes people don't make
Dialogue: 0,0:00:34.85,0:00:35.22,Default,,0000,0000,0000,,the distinction.
Dialogue: 0,0:00:35.22,0:00:37.80,Default,,0000,0000,0000,,And they'll just view this\Nas all the cash.
Dialogue: 0,0:00:37.80,0:00:41.42,Default,,0000,0000,0000,,But we really want to separate\Nthe value of the enterprise
Dialogue: 0,0:00:41.42,0:00:45.62,Default,,0000,0000,0000,,out of the market value\Nof the equity or the
Dialogue: 0,0:00:45.62,0:00:46.72,Default,,0000,0000,0000,,value of the debt.
Dialogue: 0,0:00:46.72,0:00:47.90,Default,,0000,0000,0000,,So let me just write\Nall this down.
Dialogue: 0,0:00:47.90,0:00:50.23,Default,,0000,0000,0000,,So this right here, this is\Nthe value of the business.
Dialogue: 0,0:00:50.23,0:00:51.48,Default,,0000,0000,0000,,The enterprise value.
Dialogue: 0,0:00:51.48,0:00:54.50,Default,,0000,0000,0000,,
Dialogue: 0,0:00:54.50,0:00:58.16,Default,,0000,0000,0000,,Here is the debt.
Dialogue: 0,0:00:58.16,0:00:59.49,Default,,0000,0000,0000,,There's the debt.
Dialogue: 0,0:00:59.49,0:01:01.18,Default,,0000,0000,0000,,And this is the equity.
Dialogue: 0,0:01:01.18,0:01:03.92,Default,,0000,0000,0000,,
Dialogue: 0,0:01:03.92,0:01:06.87,Default,,0000,0000,0000,,And this is a little bit of\Na slight, I would say,
Dialogue: 0,0:01:06.87,0:01:07.19,Default,,0000,0000,0000,,technicality.
Dialogue: 0,0:01:07.19,0:01:08.95,Default,,0000,0000,0000,,And you don't have to worry\Nabout this if it
Dialogue: 0,0:01:08.95,0:01:10.10,Default,,0000,0000,0000,,confuses you at all.
Dialogue: 0,0:01:10.10,0:01:12.78,Default,,0000,0000,0000,,When I write the enterprise\Nhere, this is the value of the
Dialogue: 0,0:01:12.78,0:01:13.73,Default,,0000,0000,0000,,business itself.
Dialogue: 0,0:01:13.73,0:01:18.06,Default,,0000,0000,0000,,So it's kind of the operational\Nassets net of the
Dialogue: 0,0:01:18.06,0:01:19.23,Default,,0000,0000,0000,,operational liabilities.
Dialogue: 0,0:01:19.23,0:01:21.56,Default,,0000,0000,0000,,It's literally-- if you had\Nto go out in the past two
Dialogue: 0,0:01:21.56,0:01:24.50,Default,,0000,0000,0000,,examples and buy the pizzeria--\Nhow much net would
Dialogue: 0,0:01:24.50,0:01:26.15,Default,,0000,0000,0000,,you have to pay for\Nthat pizzeria?
Dialogue: 0,0:01:26.15,0:01:29.15,Default,,0000,0000,0000,,And that's what we're trying to\Nfigure out right here when
Dialogue: 0,0:01:29.15,0:01:31.44,Default,,0000,0000,0000,,we're talking about the\Nenterprise value.
Dialogue: 0,0:01:31.44,0:01:33.58,Default,,0000,0000,0000,,And we saw in the last couple\Nof videos how you calculate
Dialogue: 0,0:01:33.58,0:01:35.37,Default,,0000,0000,0000,,it, but it never hurts\Nto review it.
Dialogue: 0,0:01:35.37,0:01:38.07,Default,,0000,0000,0000,,This is actually one of those\Nless intuitive calculations
Dialogue: 0,0:01:38.07,0:01:40.38,Default,,0000,0000,0000,,the first few times you\Nsee it, so it doesn't
Dialogue: 0,0:01:40.38,0:01:41.97,Default,,0000,0000,0000,,hurt to do it again.
Dialogue: 0,0:01:41.97,0:01:43.95,Default,,0000,0000,0000,,So the first thing to figure out\Nis, how do you figure out
Dialogue: 0,0:01:43.95,0:01:45.68,Default,,0000,0000,0000,,the market value\Nof the equity?
Dialogue: 0,0:01:45.68,0:01:47.40,Default,,0000,0000,0000,,The book value of the\Nequity is very easy.
Dialogue: 0,0:01:47.40,0:01:49.57,Default,,0000,0000,0000,,You could go into a company's\Nbalance sheet and they'll
Dialogue: 0,0:01:49.57,0:01:50.07,Default,,0000,0000,0000,,write down a number.
Dialogue: 0,0:01:50.07,0:01:54.12,Default,,0000,0000,0000,,They'll say, this is what our\Naccountants say that the book
Dialogue: 0,0:01:54.12,0:01:55.73,Default,,0000,0000,0000,,value of our equity is worth.
Dialogue: 0,0:01:55.73,0:01:58.26,Default,,0000,0000,0000,,But the market value, figure it\Nout from what the market's
Dialogue: 0,0:01:58.26,0:01:59.58,Default,,0000,0000,0000,,willing to pay for a share.
Dialogue: 0,0:01:59.58,0:02:07.67,Default,,0000,0000,0000,,So the market value of equity or\Nthe market cap is equal to
Dialogue: 0,0:02:07.67,0:02:11.52,Default,,0000,0000,0000,,price per share times the\Nnumber of shares.
Dialogue: 0,0:02:11.52,0:02:14.04,Default,,0000,0000,0000,,
Dialogue: 0,0:02:14.04,0:02:16.24,Default,,0000,0000,0000,,And that's the market value\Nof this equity.
Dialogue: 0,0:02:16.24,0:02:18.80,Default,,0000,0000,0000,,And you can see, just even from\Nthis diagram, that the
Dialogue: 0,0:02:18.80,0:02:25.23,Default,,0000,0000,0000,,enterprise value plus the\Nnon-operating cash or
Dialogue: 0,0:02:25.23,0:02:28.59,Default,,0000,0000,0000,,investments or liquid\Ninvestments, whatever you want
Dialogue: 0,0:02:28.59,0:02:29.28,Default,,0000,0000,0000,,to call them.
Dialogue: 0,0:02:29.28,0:02:37.58,Default,,0000,0000,0000,,Enterprise value plus the cash\Nis equal to the debt plus,
Dialogue: 0,0:02:37.58,0:02:39.42,Default,,0000,0000,0000,,let's just say the market cap.
Dialogue: 0,0:02:39.42,0:02:42.97,Default,,0000,0000,0000,,Because we want to know, when we\Nlook at a price, we want to
Dialogue: 0,0:02:42.97,0:02:45.23,Default,,0000,0000,0000,,be able to figure out what\Nis the market saying the
Dialogue: 0,0:02:45.23,0:02:46.97,Default,,0000,0000,0000,,enterprise value of\Nthe company is?
Dialogue: 0,0:02:46.97,0:02:49.50,Default,,0000,0000,0000,,What is the market value\Nof the enterprise?
Dialogue: 0,0:02:49.50,0:02:51.82,Default,,0000,0000,0000,,So debt plus-- instead of\Nequity-- I'll write market
Dialogue: 0,0:02:51.82,0:02:54.02,Default,,0000,0000,0000,,capitalization, because\Nit's the same thing.
Dialogue: 0,0:02:54.02,0:02:58.15,Default,,0000,0000,0000,,Market capitalization is the\Nmarket's value of the equity
Dialogue: 0,0:02:58.15,0:02:59.84,Default,,0000,0000,0000,,plus market cap.
Dialogue: 0,0:02:59.84,0:03:01.69,Default,,0000,0000,0000,,So we know market cap.
Dialogue: 0,0:03:01.69,0:03:04.24,Default,,0000,0000,0000,,We can look up the debt on a\Ncompany's balance sheet.
Dialogue: 0,0:03:04.24,0:03:05.82,Default,,0000,0000,0000,,We can look up the cash.
Dialogue: 0,0:03:05.82,0:03:09.47,Default,,0000,0000,0000,,So we just subtract cash from\Nboth sides, and we get
Dialogue: 0,0:03:09.47,0:03:20.48,Default,,0000,0000,0000,,enterprise value is equal\Nto market cap
Dialogue: 0,0:03:20.48,0:03:25.12,Default,,0000,0000,0000,,plus debt minus cash.
Dialogue: 0,0:03:25.12,0:03:27.50,Default,,0000,0000,0000,,We're just taking cash\Nonto the right-hand
Dialogue: 0,0:03:27.50,0:03:30.73,Default,,0000,0000,0000,,side of this equation.
Dialogue: 0,0:03:30.73,0:03:35.07,Default,,0000,0000,0000,,So for example, if I have a\Nstock that is trading at-
Dialogue: 0,0:03:35.07,0:03:38.65,Default,,0000,0000,0000,,let's say the price is $10.
Dialogue: 0,0:03:38.65,0:03:45.29,Default,,0000,0000,0000,,And let's say that there\Nare 1 million shares.
Dialogue: 0,0:03:45.29,0:03:52.45,Default,,0000,0000,0000,,And let's say that the company\Nhas $50 million of debt.
Dialogue: 0,0:03:52.45,0:03:59.40,Default,,0000,0000,0000,,And let's say it has $5 million\Nof excess cash, what's
Dialogue: 0,0:03:59.40,0:04:00.88,Default,,0000,0000,0000,,its enterprise value?
Dialogue: 0,0:04:00.88,0:04:02.51,Default,,0000,0000,0000,,Well, you first figure\Nout its market cap.
Dialogue: 0,0:04:02.51,0:04:06.75,Default,,0000,0000,0000,,Its market cap is $10 per share\Ntimes a million shares.
Dialogue: 0,0:04:06.75,0:04:08.67,Default,,0000,0000,0000,,So that's 10 million shares.
Dialogue: 0,0:04:08.67,0:04:10.51,Default,,0000,0000,0000,,That's the market cap.
Dialogue: 0,0:04:10.51,0:04:11.41,Default,,0000,0000,0000,,You add the debt.
Dialogue: 0,0:04:11.41,0:04:13.56,Default,,0000,0000,0000,,So, plus $50 million.
Dialogue: 0,0:04:13.56,0:04:15.76,Default,,0000,0000,0000,,And once again, I said this in\Nthe last video, it's very
Dialogue: 0,0:04:15.76,0:04:17.39,Default,,0000,0000,0000,,unintuitive when you figure\Nout the value of the
Dialogue: 0,0:04:17.39,0:04:19.46,Default,,0000,0000,0000,,enterprise to add the debt.
Dialogue: 0,0:04:19.46,0:04:23.48,Default,,0000,0000,0000,,And the intuition is that if\Nsomeone were to want to buy
Dialogue: 0,0:04:23.48,0:04:27.04,Default,,0000,0000,0000,,this company from the\Nstakeholders and be debt free,
Dialogue: 0,0:04:27.04,0:04:29.75,Default,,0000,0000,0000,,they would have to pay these\Npeople the total amount of
Dialogue: 0,0:04:29.75,0:04:32.27,Default,,0000,0000,0000,,debt, and they'd have to pay\Nthese people the total amount
Dialogue: 0,0:04:32.27,0:04:33.06,Default,,0000,0000,0000,,of the market value.
Dialogue: 0,0:04:33.06,0:04:35.61,Default,,0000,0000,0000,,So they'd have to pay the\Ndebt plus the equity.
Dialogue: 0,0:04:35.61,0:04:37.83,Default,,0000,0000,0000,,And they get a refund\Nof the cash.
Dialogue: 0,0:04:37.83,0:04:40.10,Default,,0000,0000,0000,,This would be extra stuff that\Nthey would be buying that they
Dialogue: 0,0:04:40.10,0:04:41.97,Default,,0000,0000,0000,,could get money back for.
Dialogue: 0,0:04:41.97,0:04:44.26,Default,,0000,0000,0000,,So you have to pay the equity\Nholders, you have to pay the
Dialogue: 0,0:04:44.26,0:04:46.72,Default,,0000,0000,0000,,debt holders, and then you\Nget a refund of the cash.
Dialogue: 0,0:04:46.72,0:04:51.63,Default,,0000,0000,0000,,And so the enterprise value's\Nwhat? $60 million minus 5.
Dialogue: 0,0:04:51.63,0:04:54.20,Default,,0000,0000,0000,,That's $55 million.
Dialogue: 0,0:04:54.20,0:04:54.78,Default,,0000,0000,0000,,Fair enough.
Dialogue: 0,0:04:54.78,0:04:58.17,Default,,0000,0000,0000,,This is all just review of the\Nenterprise value video.
Dialogue: 0,0:04:58.17,0:05:00.98,Default,,0000,0000,0000,,But the question is, now that\Nyou've figured out enterprise
Dialogue: 0,0:05:00.98,0:05:02.49,Default,,0000,0000,0000,,value, how do you figure\Nout if that's a
Dialogue: 0,0:05:02.49,0:05:04.13,Default,,0000,0000,0000,,fair enterprise value?
Dialogue: 0,0:05:04.13,0:05:06.29,Default,,0000,0000,0000,,When you looked at market\Ncapitalization you compared
Dialogue: 0,0:05:06.29,0:05:09.44,Default,,0000,0000,0000,,that to earnings.
Dialogue: 0,0:05:09.44,0:05:11.56,Default,,0000,0000,0000,,The price to earnings ratio.
Dialogue: 0,0:05:11.56,0:05:12.88,Default,,0000,0000,0000,,You were doing this\Non a per share.
Dialogue: 0,0:05:12.88,0:05:16.32,Default,,0000,0000,0000,,This is price per share divided\Nby earnings per share.
Dialogue: 0,0:05:16.32,0:05:22.35,Default,,0000,0000,0000,,This ratio's equivalent to\Nmarket cap divided by the
Dialogue: 0,0:05:22.35,0:05:23.81,Default,,0000,0000,0000,,actual net income\Nof the company.
Dialogue: 0,0:05:23.81,0:05:27.57,Default,,0000,0000,0000,,
Dialogue: 0,0:05:27.57,0:05:29.52,Default,,0000,0000,0000,,Where if you just multiply the\Nnumerator and the denominator
Dialogue: 0,0:05:29.52,0:05:32.37,Default,,0000,0000,0000,,by the number of shares, you get\Nmarket cap and net income.
Dialogue: 0,0:05:32.37,0:05:33.49,Default,,0000,0000,0000,,This is EPS.
Dialogue: 0,0:05:33.49,0:05:36.21,Default,,0000,0000,0000,,P/E is actually price\Nper share divided by
Dialogue: 0,0:05:36.21,0:05:37.24,Default,,0000,0000,0000,,earnings per share.
Dialogue: 0,0:05:37.24,0:05:38.88,Default,,0000,0000,0000,,And that was one way\Nto look at it.
Dialogue: 0,0:05:38.88,0:05:40.21,Default,,0000,0000,0000,,You could compare\Ntwo companies.
Dialogue: 0,0:05:40.21,0:05:42.57,Default,,0000,0000,0000,,And we saw it breaks down if\Nthey have different types of
Dialogue: 0,0:05:42.57,0:05:43.31,Default,,0000,0000,0000,,capital structure.
Dialogue: 0,0:05:43.31,0:05:45.88,Default,,0000,0000,0000,,So what do you compare\Nenterprise value to?
Dialogue: 0,0:05:45.88,0:05:48.67,Default,,0000,0000,0000,,Here we did market cap\Nto net income.
Dialogue: 0,0:05:48.67,0:05:52.45,Default,,0000,0000,0000,,Enterprise value should\Nbe compared to what?
Dialogue: 0,0:05:52.45,0:05:55.46,Default,,0000,0000,0000,,Now I made an argument in the\Nlast video that, well if we're
Dialogue: 0,0:05:55.46,0:05:58.34,Default,,0000,0000,0000,,looking at the enterprise, we\Nshould look at essentially the
Dialogue: 0,0:05:58.34,0:06:00.85,Default,,0000,0000,0000,,earnings that are popping\Nout of the enterprise.
Dialogue: 0,0:06:00.85,0:06:03.64,Default,,0000,0000,0000,,We should look at the earnings\Nthat are coming out of this
Dialogue: 0,0:06:03.64,0:06:05.10,Default,,0000,0000,0000,,asset right here.
Dialogue: 0,0:06:05.10,0:06:08.28,Default,,0000,0000,0000,,And on the very first video\Non the income statement, I
Dialogue: 0,0:06:08.28,0:06:10.18,Default,,0000,0000,0000,,implied that-- let's do\Na balance sheet--
Dialogue: 0,0:06:10.18,0:06:12.37,Default,,0000,0000,0000,,you have your revenue.
Dialogue: 0,0:06:12.37,0:06:14.74,Default,,0000,0000,0000,,Your revenue could be 100.
Dialogue: 0,0:06:14.74,0:06:18.73,Default,,0000,0000,0000,,You have your cost\Nof goods sold.
Dialogue: 0,0:06:18.73,0:06:23.13,Default,,0000,0000,0000,,Cost of goods sold could be,\Nlet's say it's minus 50.
Dialogue: 0,0:06:23.13,0:06:24.52,Default,,0000,0000,0000,,And I'll show you another\Nconvention.
Dialogue: 0,0:06:24.52,0:06:27.72,Default,,0000,0000,0000,,One of the commenters suggested\Nthat I do this
Dialogue: 0,0:06:27.72,0:06:28.10,Default,,0000,0000,0000,,convention.
Dialogue: 0,0:06:28.10,0:06:30.38,Default,,0000,0000,0000,,Which is actually the most\Ntypical convention for a lot
Dialogue: 0,0:06:30.38,0:06:32.26,Default,,0000,0000,0000,,of accountants and financial\Nanalysts.
Dialogue: 0,0:06:32.26,0:06:34.05,Default,,0000,0000,0000,,Instead of writing a negative,\Nthey'll write it in
Dialogue: 0,0:06:34.05,0:06:34.72,Default,,0000,0000,0000,,parentheses.
Dialogue: 0,0:06:34.72,0:06:36.00,Default,,0000,0000,0000,,That means negative.
Dialogue: 0,0:06:36.00,0:06:38.27,Default,,0000,0000,0000,,Minus 50.
Dialogue: 0,0:06:38.27,0:06:45.06,Default,,0000,0000,0000,,And then the gross profit\Nwould be 50.
Dialogue: 0,0:06:45.06,0:06:47.35,Default,,0000,0000,0000,,And then, actually I want to\Ndo something a little bit
Dialogue: 0,0:06:47.35,0:06:47.75,Default,,0000,0000,0000,,interesting.
Dialogue: 0,0:06:47.75,0:06:50.83,Default,,0000,0000,0000,,Let's say that this cost of\Ngoods sold, it involves no
Dialogue: 0,0:06:50.83,0:06:52.17,Default,,0000,0000,0000,,depreciation or amortization.
Dialogue: 0,0:06:52.17,0:06:55.36,Default,,0000,0000,0000,,And watch those videos if\Nthose words confuse you.
Dialogue: 0,0:06:55.36,0:06:57.72,Default,,0000,0000,0000,,And all of the appreciation and\Namortization is actually
Dialogue: 0,0:06:57.72,0:06:58.85,Default,,0000,0000,0000,,occurring at the corporate\Nlevel.
Dialogue: 0,0:06:58.85,0:07:04.76,Default,,0000,0000,0000,,So let's say that there\Nis some SG&A.
Dialogue: 0,0:07:04.76,0:07:07.24,Default,,0000,0000,0000,,But this is without the\Ndepreciation and amortization.
Dialogue: 0,0:07:07.24,0:07:14.63,Default,,0000,0000,0000,,So let's say that this\Nis an expense of 10.
Dialogue: 0,0:07:14.63,0:07:16.11,Default,,0000,0000,0000,,Let's say there's some\Ndepreciation and
Dialogue: 0,0:07:16.11,0:07:18.50,Default,,0000,0000,0000,,amortization as well.
Dialogue: 0,0:07:18.50,0:07:20.99,Default,,0000,0000,0000,,D&A.
Dialogue: 0,0:07:20.99,0:07:23.25,Default,,0000,0000,0000,,In the last couple of videos\NI kind of grouped.
Dialogue: 0,0:07:23.25,0:07:24.49,Default,,0000,0000,0000,,And that tends to be the case.
Dialogue: 0,0:07:24.49,0:07:26.54,Default,,0000,0000,0000,,On a lot of income statements\Nthey won't separate out the
Dialogue: 0,0:07:26.54,0:07:28.06,Default,,0000,0000,0000,,depreciation and amortization.
Dialogue: 0,0:07:28.06,0:07:29.47,Default,,0000,0000,0000,,And you'll actually have to\Nlook at the cash flow
Dialogue: 0,0:07:29.47,0:07:30.89,Default,,0000,0000,0000,,statement to figure\Nout what this is.
Dialogue: 0,0:07:30.89,0:07:32.92,Default,,0000,0000,0000,,And I'm going to do that\Nin a future video.
Dialogue: 0,0:07:32.92,0:07:34.56,Default,,0000,0000,0000,,But let's say that we actually\Ndo break it out.
Dialogue: 0,0:07:34.56,0:07:35.70,Default,,0000,0000,0000,,Sometimes that does happen.
Dialogue: 0,0:07:35.70,0:07:39.20,Default,,0000,0000,0000,,And let's say that\Nthat's another 5.
Dialogue: 0,0:07:39.20,0:07:41.62,Default,,0000,0000,0000,,Maybe these are in thousands.
Dialogue: 0,0:07:41.62,0:07:45.16,Default,,0000,0000,0000,,And then you're left with\Nthe operating profit.
Dialogue: 0,0:07:45.16,0:07:49.41,Default,,0000,0000,0000,,
Dialogue: 0,0:07:49.41,0:07:53.74,Default,,0000,0000,0000,,In this case, which is 50\Nminus 15, so it's 35.
Dialogue: 0,0:07:53.74,0:07:55.01,Default,,0000,0000,0000,,And then you have things\Nbelow that.
Dialogue: 0,0:07:55.01,0:07:58.36,Default,,0000,0000,0000,,You have interest. And I'll do\Nthose just for-- you have the
Dialogue: 0,0:07:58.36,0:08:00.42,Default,,0000,0000,0000,,non-operating income and\Ninterest and all that.
Dialogue: 0,0:08:00.42,0:08:01.15,Default,,0000,0000,0000,,Let me just do that.
Dialogue: 0,0:08:01.15,0:08:08.16,Default,,0000,0000,0000,,Interest. Let's say that that is\Nalso 5,000, if that's what
Dialogue: 0,0:08:08.16,0:08:09.43,Default,,0000,0000,0000,,we care about.
Dialogue: 0,0:08:09.43,0:08:11.75,Default,,0000,0000,0000,,And then you have pre-tax.
Dialogue: 0,0:08:11.75,0:08:13.50,Default,,0000,0000,0000,,I didn't put the non-operating\Nincome.
Dialogue: 0,0:08:13.50,0:08:15.82,Default,,0000,0000,0000,,Let's say this cash isn't\Ngenerating anything.
Dialogue: 0,0:08:15.82,0:08:19.57,Default,,0000,0000,0000,,So pre-tax income is 30,000,\Nif that's what
Dialogue: 0,0:08:19.57,0:08:20.71,Default,,0000,0000,0000,,we're dealing with.
Dialogue: 0,0:08:20.71,0:08:21.92,Default,,0000,0000,0000,,It's getting a little messy.
Dialogue: 0,0:08:21.92,0:08:23.48,Default,,0000,0000,0000,,So then you have taxes.
Dialogue: 0,0:08:23.48,0:08:25.39,Default,,0000,0000,0000,,Let's say it's 1/3.
Dialogue: 0,0:08:25.39,0:08:27.38,Default,,0000,0000,0000,,It's 10,000 of taxes.
Dialogue: 0,0:08:27.38,0:08:28.63,Default,,0000,0000,0000,,And then you have earnings.
Dialogue: 0,0:08:28.63,0:08:31.09,Default,,0000,0000,0000,,
Dialogue: 0,0:08:31.09,0:08:33.41,Default,,0000,0000,0000,,30 minus 10 is 20,000.
Dialogue: 0,0:08:33.41,0:08:37.25,Default,,0000,0000,0000,,So I suggested, what part of\Nthis income statement is
Dialogue: 0,0:08:37.25,0:08:40.06,Default,,0000,0000,0000,,dependent purely on this\Npiece right here?
Dialogue: 0,0:08:40.06,0:08:45.45,Default,,0000,0000,0000,,
Dialogue: 0,0:08:45.45,0:08:47.18,Default,,0000,0000,0000,,Well all this stuff with\Ninterest, that's
Dialogue: 0,0:08:47.18,0:08:48.57,Default,,0000,0000,0000,,dependent on the debt.
Dialogue: 0,0:08:48.57,0:08:50.81,Default,,0000,0000,0000,,And essentially taxes is also\Ndependent on the debt.
Dialogue: 0,0:08:50.81,0:08:52.63,Default,,0000,0000,0000,,Because the more interest\Nyou have, the more
Dialogue: 0,0:08:52.63,0:08:53.50,Default,,0000,0000,0000,,you can deduct it.
Dialogue: 0,0:08:53.50,0:08:58.98,Default,,0000,0000,0000,,And so all of this down\Nhere is dependent on
Dialogue: 0,0:08:58.98,0:09:01.30,Default,,0000,0000,0000,,your capital structure.
Dialogue: 0,0:09:01.30,0:09:03.62,Default,,0000,0000,0000,,So if you wanted to look just\Nwhat the enterprise value is
Dialogue: 0,0:09:03.62,0:09:05.81,Default,,0000,0000,0000,,generating, it's generating\Nthe operating profit.
Dialogue: 0,0:09:05.81,0:09:10.22,Default,,0000,0000,0000,,
Dialogue: 0,0:09:10.22,0:09:13.22,Default,,0000,0000,0000,,So I suggested that a pretty\Ngood ratio, although this is
Dialogue: 0,0:09:13.22,0:09:14.20,Default,,0000,0000,0000,,very non traditional.
Dialogue: 0,0:09:14.20,0:09:16.05,Default,,0000,0000,0000,,It's not very not traditional,\Nbut you don't
Dialogue: 0,0:09:16.05,0:09:17.97,Default,,0000,0000,0000,,hear it said a lot.
Dialogue: 0,0:09:17.97,0:09:21.73,Default,,0000,0000,0000,,I'd argue that you could look at\NEV to operating profit as a
Dialogue: 0,0:09:21.73,0:09:22.98,Default,,0000,0000,0000,,good metric.
Dialogue: 0,0:09:22.98,0:09:29.30,Default,,0000,0000,0000,,
Dialogue: 0,0:09:29.30,0:09:36.55,Default,,0000,0000,0000,,Which in a lot of cases is the\Ninverse of the return on
Dialogue: 0,0:09:36.55,0:09:39.20,Default,,0000,0000,0000,,assets, as I defined it\Nin the first video.
Dialogue: 0,0:09:39.20,0:09:41.77,Default,,0000,0000,0000,,There's a lot of different\Nreturn on asset definitions.
Dialogue: 0,0:09:41.77,0:09:44.35,Default,,0000,0000,0000,,But it's essentially saying, for\Nevery dollar of operating
Dialogue: 0,0:09:44.35,0:09:46.94,Default,,0000,0000,0000,,profit, how much are you paying\Nfor the enterprise.
Dialogue: 0,0:09:46.94,0:09:49.01,Default,,0000,0000,0000,,Which I think is a pretty\Ngood metric.
Dialogue: 0,0:09:49.01,0:09:52.34,Default,,0000,0000,0000,,Now, the more conventional\Nmetric that you'll see when
Dialogue: 0,0:09:52.34,0:09:55.10,Default,,0000,0000,0000,,you see people talk about\Nenterprise values, enterprise
Dialogue: 0,0:09:55.10,0:09:56.37,Default,,0000,0000,0000,,value to EBITDA.
Dialogue: 0,0:09:56.37,0:09:59.34,Default,,0000,0000,0000,,And if you go and get a job as\Na research analyst at some
Dialogue: 0,0:09:59.34,0:10:01.55,Default,,0000,0000,0000,,firm, this is going to be\Nsomething that you're going to
Dialogue: 0,0:10:01.55,0:10:03.62,Default,,0000,0000,0000,,be expected to calculate\Nfor a company.
Dialogue: 0,0:10:03.62,0:10:06.41,Default,,0000,0000,0000,,And hopefully talk reasonably\Nintelligently about it.
Dialogue: 0,0:10:06.41,0:10:10.08,Default,,0000,0000,0000,,So the first question, to talk\Nreasonably intelligently about
Dialogue: 0,0:10:10.08,0:10:11.72,Default,,0000,0000,0000,,anything is, what is EBITDA?
Dialogue: 0,0:10:11.72,0:10:18.46,Default,,0000,0000,0000,,So EBITDA is Earnings Before\NInterest, Taxes, Depreciation
Dialogue: 0,0:10:18.46,0:10:20.30,Default,,0000,0000,0000,,and Amortization.
Dialogue: 0,0:10:20.30,0:10:22.56,Default,,0000,0000,0000,,So let's see what that\Nwould be here.
Dialogue: 0,0:10:22.56,0:10:28.89,Default,,0000,0000,0000,,So it's earnings before\Ninterest, taxes, depreciation
Dialogue: 0,0:10:28.89,0:10:29.90,Default,,0000,0000,0000,,and amortization.
Dialogue: 0,0:10:29.90,0:10:32.28,Default,,0000,0000,0000,,So it's before all\Nof this stuff.
Dialogue: 0,0:10:32.28,0:10:33.92,Default,,0000,0000,0000,,Actually, let's compare that to
Dialogue: 0,0:10:33.92,0:10:35.12,Default,,0000,0000,0000,,something we covered before.
Dialogue: 0,0:10:35.12,0:10:36.37,Default,,0000,0000,0000,,So you have EBITDA.
Dialogue: 0,0:10:36.37,0:10:39.28,Default,,0000,0000,0000,,
Dialogue: 0,0:10:39.28,0:10:41.66,Default,,0000,0000,0000,,And you have EBIT.
Dialogue: 0,0:10:41.66,0:10:45.66,Default,,0000,0000,0000,,EBIT is Earnings Before\NInterest and Taxes.
Dialogue: 0,0:10:45.66,0:10:47.52,Default,,0000,0000,0000,,So EBIT is earnings.
Dialogue: 0,0:10:47.52,0:10:49.24,Default,,0000,0000,0000,,You add back taxes and\Ninterest. You're
Dialogue: 0,0:10:49.24,0:10:51.35,Default,,0000,0000,0000,,at operating profit.
Dialogue: 0,0:10:51.35,0:10:53.53,Default,,0000,0000,0000,,And I've gone over this in the\Npast, but the distinction
Dialogue: 0,0:10:53.53,0:10:57.22,Default,,0000,0000,0000,,between operating profit and\NEBIT is that EBIT might
Dialogue: 0,0:10:57.22,0:10:59.08,Default,,0000,0000,0000,,include some non-operating\Nincome, which
Dialogue: 0,0:10:59.08,0:10:59.89,Default,,0000,0000,0000,,I haven't put here.
Dialogue: 0,0:10:59.89,0:11:03.79,Default,,0000,0000,0000,,But if this cash was generating\Nsome profit
Dialogue: 0,0:11:03.79,0:11:05.74,Default,,0000,0000,0000,,unrelated to the operations\Nof the business, it'd
Dialogue: 0,0:11:05.74,0:11:06.62,Default,,0000,0000,0000,,be included in EBIT.
Dialogue: 0,0:11:06.62,0:11:07.81,Default,,0000,0000,0000,,It wouldn't be an operating\Nprofit.
Dialogue: 0,0:11:07.81,0:11:10.90,Default,,0000,0000,0000,,But they're usually pretty close\Nif we're talking about,
Dialogue: 0,0:11:10.90,0:11:13.31,Default,,0000,0000,0000,,let's say, a non-financial\Ntype of business.
Dialogue: 0,0:11:13.31,0:11:14.37,Default,,0000,0000,0000,,So this is EBIT.
Dialogue: 0,0:11:14.37,0:11:16.44,Default,,0000,0000,0000,,And if you want to get EBITDA,\Nyou just add back the
Dialogue: 0,0:11:16.44,0:11:18.67,Default,,0000,0000,0000,,depreciation and amortization.
Dialogue: 0,0:11:18.67,0:11:20.31,Default,,0000,0000,0000,,So EBITDA would be here.
Dialogue: 0,0:11:20.31,0:11:23.51,Default,,0000,0000,0000,,
Dialogue: 0,0:11:23.51,0:11:27.44,Default,,0000,0000,0000,,So the EBIT is 35,000.
Dialogue: 0,0:11:27.44,0:11:30.38,Default,,0000,0000,0000,,If you add that back,\Nit would be 40,000.
Dialogue: 0,0:11:30.38,0:11:32.51,Default,,0000,0000,0000,,So the EBITDA in this\Ncase is 40.
Dialogue: 0,0:11:32.51,0:11:36.36,Default,,0000,0000,0000,,And if my units are in\Nthousands, it's 40,000.
Dialogue: 0,0:11:36.36,0:11:39.45,Default,,0000,0000,0000,,Now the question is, why do\Npeople care about EBITDA?
Dialogue: 0,0:11:39.45,0:11:42.71,Default,,0000,0000,0000,,Why is EBITDA used instead\Nof operating profit?
Dialogue: 0,0:11:42.71,0:11:45.61,Default,,0000,0000,0000,,And the logic is that\Ndepreciation and amortization,
Dialogue: 0,0:11:45.61,0:11:48.04,Default,,0000,0000,0000,,and we did this in the\Ndepreciation and amortization
Dialogue: 0,0:11:48.04,0:11:50.86,Default,,0000,0000,0000,,videos, these are just\Nspread-out costs that
Dialogue: 0,0:11:50.86,0:11:54.24,Default,,0000,0000,0000,,necessarily aren't cash going\Nout the door in this period.
Dialogue: 0,0:11:54.24,0:11:56.39,Default,,0000,0000,0000,,We saw that this depreciation\Nand amortization.
Dialogue: 0,0:11:56.39,0:12:01.12,Default,,0000,0000,0000,,Maybe this is, I bought\Na $100 or $100,000
Dialogue: 0,0:12:01.12,0:12:03.02,Default,,0000,0000,0000,,object 10 years ago.
Dialogue: 0,0:12:03.02,0:12:09.25,Default,,0000,0000,0000,,And every year I depreciate\N1/20 of it.
Dialogue: 0,0:12:09.25,0:12:11.18,Default,,0000,0000,0000,,But the cash went out the\Ndoor 20 years ago.
Dialogue: 0,0:12:11.18,0:12:14.22,Default,,0000,0000,0000,,And so this depreciation and\Namortization in this period,
Dialogue: 0,0:12:14.22,0:12:16.04,Default,,0000,0000,0000,,it isn't necessarily cash\Nout of the door.
Dialogue: 0,0:12:16.04,0:12:17.35,Default,,0000,0000,0000,,In fact, it isn't cash\Nout the door.
Dialogue: 0,0:12:17.35,0:12:20.19,Default,,0000,0000,0000,,We'll talk in future videos\Nabout how do you find out what
Dialogue: 0,0:12:20.19,0:12:22.39,Default,,0000,0000,0000,,the cash out the door\Nis in a period.
Dialogue: 0,0:12:22.39,0:12:24.18,Default,,0000,0000,0000,,So it's considered a\Nnon-cash expense.
Dialogue: 0,0:12:24.18,0:12:27.21,Default,,0000,0000,0000,,
Dialogue: 0,0:12:27.21,0:12:30.58,Default,,0000,0000,0000,,So when you figure out EBITDA,\Nwhen you add back taxes, you
Dialogue: 0,0:12:30.58,0:12:33.29,Default,,0000,0000,0000,,add back interest, and you\Nadd back depreciation and
Dialogue: 0,0:12:33.29,0:12:34.36,Default,,0000,0000,0000,,amortization.
Dialogue: 0,0:12:34.36,0:12:37.82,Default,,0000,0000,0000,,What you're left with is\Nessentially, how much raw cash
Dialogue: 0,0:12:37.82,0:12:39.92,Default,,0000,0000,0000,,is the enterprise\Nspitting out?
Dialogue: 0,0:12:39.92,0:12:43.72,Default,,0000,0000,0000,,
Dialogue: 0,0:12:43.72,0:12:45.95,Default,,0000,0000,0000,,And a lot of people care about\Nthis because this is an
Dialogue: 0,0:12:45.95,0:12:47.51,Default,,0000,0000,0000,,indication of, one,\Nthe company's
Dialogue: 0,0:12:47.51,0:12:50.15,Default,,0000,0000,0000,,ability to do things.
Dialogue: 0,0:12:50.15,0:12:54.01,Default,,0000,0000,0000,,To do things like pay its\Ninterest, pay its taxes, or
Dialogue: 0,0:12:54.01,0:12:55.63,Default,,0000,0000,0000,,invest in the business itself.
Dialogue: 0,0:12:55.63,0:13:03.01,Default,,0000,0000,0000,,Or another way to view it is,\Nif you look at EV to EBITDA,
Dialogue: 0,0:13:03.01,0:13:06.03,Default,,0000,0000,0000,,you're saying for every dollar\Nof raw cash that this
Dialogue: 0,0:13:06.03,0:13:07.36,Default,,0000,0000,0000,,business spits out.
Dialogue: 0,0:13:07.36,0:13:10.49,Default,,0000,0000,0000,,And let's say I were not to\Nreinvest in the business or
Dialogue: 0,0:13:10.49,0:13:11.59,Default,,0000,0000,0000,,buy new equipment.
Dialogue: 0,0:13:11.59,0:13:13.85,Default,,0000,0000,0000,,If it's just raw dollars, how\Nmuch am I paying for the
Dialogue: 0,0:13:13.85,0:13:14.76,Default,,0000,0000,0000,,enterprise?
Dialogue: 0,0:13:14.76,0:13:16.86,Default,,0000,0000,0000,,And a general rule of thumb, and\Nwe'll do more on this in
Dialogue: 0,0:13:16.86,0:13:17.29,Default,,0000,0000,0000,,the future.
Dialogue: 0,0:13:17.29,0:13:21.21,Default,,0000,0000,0000,,I think I'm already well over my\Nregular time limit, is that
Dialogue: 0,0:13:21.21,0:13:26.09,Default,,0000,0000,0000,,for a very, stable, simple,\Nnon-declining non-growing
Dialogue: 0,0:13:26.09,0:13:30.33,Default,,0000,0000,0000,,business, five times EBITDA is\Nconsidered a good valuation.
Dialogue: 0,0:13:30.33,0:13:34.34,Default,,0000,0000,0000,,But what matters more is what\Nother companies in that
Dialogue: 0,0:13:34.34,0:13:35.49,Default,,0000,0000,0000,,industry are trading at.
Dialogue: 0,0:13:35.49,0:13:38.27,Default,,0000,0000,0000,,So all of these ratios\Nare better as
Dialogue: 0,0:13:38.27,0:13:40.16,Default,,0000,0000,0000,,relative valuation metrics.
Dialogue: 0,0:13:40.16,0:13:42.24,Default,,0000,0000,0000,,In the future I'll show you how\Nto do maybe a discounted
Dialogue: 0,0:13:42.24,0:13:46.16,Default,,0000,0000,0000,,cash flow or a discounted free\Ncash flow type of analysis.
Dialogue: 0,0:13:46.16,0:13:48.41,Default,,0000,0000,0000,,Or a dividend discount model or\Nsomething, so you can kind
Dialogue: 0,0:13:48.41,0:13:49.89,Default,,0000,0000,0000,,of figure out an\Nabsolute value.
Dialogue: 0,0:13:49.89,0:13:52.83,Default,,0000,0000,0000,,But when you're looking in\Npublic markets, when you're
Dialogue: 0,0:13:52.83,0:13:55.33,Default,,0000,0000,0000,,picking to decide something,\Nyou're also implicitly picking
Dialogue: 0,0:13:55.33,0:13:56.65,Default,,0000,0000,0000,,not to buy other things.
Dialogue: 0,0:13:56.65,0:13:58.69,Default,,0000,0000,0000,,When you're choosing to sell\Nsomething, you're also
Dialogue: 0,0:13:58.69,0:14:00.80,Default,,0000,0000,0000,,implicitly choosing not\Nto sell other things.
Dialogue: 0,0:14:00.80,0:14:04.11,Default,,0000,0000,0000,,So relative value starts to\Nmatter a little bit more.
Dialogue: 0,0:14:04.11,0:14:06.91,Default,,0000,0000,0000,,Anyway, hopefully you\Nfound that helpful.