EV to Assets – EV or Enterprise value, divided by Assets, is one of the key valuation ratios in financial parlance which help measure a company’s worth. There are several other ratios arrived by dividing various financial metrics by EV and this is perhaps one of the most significant of all these ratios.

We note from below that Amazon and Facebook have EV to Assets of 4.06x and 4.66x, respectively. However, Exxon has a lower EV to Assets of 1.27x.

source: ycharts

Like most other financial ratios, EV to Assets too has its own advantages and disadvantages as far as revealing valuable information about the worth of a company is concerned. However, first, it would be essential to define some key concepts before moving on the same.

What is Enterprise Value (EV)?

Enterprise Value is thought of as representative of the actual value of the company which takes into account both its equity and debt to arrive at a realistic figure of what a company is truly worth. Unlike market capitalization, which looks at equity in isolation, EV helps paint a more realistic picture of the value of a business by adding debt to the figure.

This is why EV is often contrasted against Market Capitalization for their difference in the approach adopted for evaluating a company. EV can also be considered as the ‘takeover price’ of a business which is why cash and its equivalents are deducted from the total debt to give an idea of net debt that would need to be paid after the business acquisition.

Enterprise Value Formula = Market Capitalization + Debt + Minority Interest + Preferred Shares – Cash and Cash Equivalents

What are Assets?

It would be important here to understand what constitutes assets of a company in the first place. These include both long-term business assets, such as real estate and current assets, such as receivables. They can also be defined as core assets which might have a direct role to play in business operations and non-core assets which have a little direct role in business operations. Depending on how assets are defined within a particular context, can the utility of this valuation multiple be measured.

EV to Assets Formula

EV/Assets = Enterprise Value {Market Capitalization + Debt + Minority Interest + Preferred Shares – Cash and Cash Equivalents} / Assets

EV to Assets Examples

Let us look at this below calculation of EV to Assets.

• Company ABC: Enterprise Value (31 Million) / Assets (22 Million) = 1.409 (EV to Assets)
• Company XYZ: Enterprise Value (23 Million) / Assets (20 Million) = 1.15 (EV to Assets)

Here it can be seen that the company with lower EV to Assets value, i.e., Company XYZ is a much better choice as compared to Company ABC because of a higher proportion of assets as compared against its enterprise value.

With this, let us look at an example from Oil & Gas sector.

source: ycharts

We note that EV to Assets of Exxon Mobil, Royal Dutch Shell, and BP are 1.27x, 0.72x and 0.59x. If we do not consider any other valuation parameter and go only by EV to Assets, then BP is a better choice as it has a higher proportion of Assets when compared to its enterprise value.

Advantages & Disadvantages of EV to Assets Valuation Multiple:

1. EV to Assets is a key valuation multiple as we have already discussed above. It is especially useful if the business is asset-driven and Return On Assets (ROA) is more or less constant. This would also make assets the perfect indicator of Future Cash Flows (FCF).
2. A high EV to Assets multiple would indicate the business is overvalued in relation to the value of its assets and if it’s on the lower side, the business is undervalued.
3. This valuation multiple helps look at an investment from the point of view of its capital structure. Keeping the total value of capital structure of a business in mind, investors can better understand if the face value is attractively priced to buy its debt if nothing else. This gives a fundamental idea of the value of an investment, especially in asset-driven industries.
4. Assets are one of the key determinants of the value of a firm which might be of immense utility in helping understand actual worth of a business. However, value of certain types of assets, for instance, intangible assets can more than often stand on mere assumptions. On the other hand, even fixed assets might be entangled in issues that can affect their actual worth.
5. It must always be remembered that assets can be defined and categorized in a variety of ways which can play into this figure and lead to an erroneous impression of what a business might actually be worth in terms of its capital structure.

Conclusion: EV to Assets

It goes without saying that this valuation multiple has its own limitations and drawbacks but it offers a unique perspective of the company’s worth by taking into account its total assets against its actual worth, as measured by EV or enterprise value. It can be used with considerable advantage in comparable company analysis as well which would give a fair idea where a company stands against its peers in terms of its capital structure.

Problems with this metric are pretty obvious to anyone with a practical idea of how assets might be exaggerated on the balance sheets or evaporate in thin air the moment their real worth is to be estimated, as happens all too often with the intangible assets. Depreciation in the value of assets is another factor along with a plethora of legal and other issues which can even put a question mark on the true worth of fixed assets at times. Keeping its limitations in mind, EV to Assets can be a useful financial metric for anyone willing to invest in a business, along with other enterprise valuation multiples.

Recommended Articles –

This has been a guide to EV to Assets, its formula, calculations, advantages, and disadvantages. You may also look at these below valuation articles to enhance your knowledge –

• EV to EBIT Valuation Ratio
• EV to EBITDA Multiple
• Enterprise Value to Sales Valuation
• Minority Interest examples
• Market Capitalization Formula
• Market Cap vs Enterprise Value | Same or Different?

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