Industrial application of enterprise value

At present, almost all the world-renowned investment banks regard enterprise value or value-related indicators as the main basis for evaluating enterprises and their stocks. Goldman Sachs and First Boston Credit Bank, the two most famous investment banks in the United States, attach great importance to enterprise value indicators. Goldman Sachs believes that indicators based on accounting figures such as earnings per share and return on net assets can be controlled by accounting methods. These traditional evaluation methods only include debt cost, but not equity cost ... Paying attention to enterprise value can improve the level of financial analysis and improve enterprise management. The First Boston Bank has also made a similar statement: earnings per share can be manipulated by accounting means, and this indicator cannot clearly explain various variables that determine value, such as economic profit and competitive advantage of enterprises. The enterprise value method clearly shows the business risk and financial risk of the enterprise, enables investors to judge the quantity of investment return and the sustainability of return, and reveals three basic principles of value creation, namely cash flow, risk and sustainability of return.

Some very successful investment analysts and fund managers never pay attention to the original accounting data, and they judge the value of the enterprise through in-depth analysis of the original data of the enterprise. For example, Warren Buffett likes to study accounting tricks in company annual reports. What he wants is not the apparent profit, but the revised data obtained after adjusting and eliminating human factors, such as free cash flow. The analysis methods of these analysts are actually based on the enterprise value thought.

Taking free cash flow as the evaluation index, considering the cost of capital and the viability of enterprises, we can realize enterprise value management, define the long-term interests of enterprises, determine the allocation direction of strategic resources, effectively control the behavior patterns of enterprise members, and enhance the ability of enterprises to adapt to and influence the environment.