The TOP 101 of Estonia’s Most Valuable Enterprises was the product of a collaboration between Nasdaq and financial advisory firm Prudentia, compiled in the final months of 2019 when no one had yet heard of COVID-19, which has had such a devastating effect on the world’s economy today. Based on the 2018 annual reports of Estonian enterprises, the aim of the new ranking and the entire project was to generate a public discussion around the value of enterprises and value creation more broadly. After all, it’s enterprises that are the driving engine and source of value in a country’s economy, fulfilling an important role in society. Enterprise value is important feedback for the entrepreneur on the work they have done. By continuing to collate the TOP 101 ranking in the future, we’ll create a timeline of information that will allow us to analyze trends and changes over time and through cycles of economic change. Today, the world as we know it has largely changed and the value of the ranking, in addition to the nostalgia of remembering the good old times, is that we have fixed the state of the pre-crisis Estonian economy at its peak. In the coming years, we can now reliably measure if and to what extent there has been economic recovery, and hopefully for some companies, improvement.

What sets the Estonian TOP 101 apart from other rankings?

There have been and still are many business rankings in Estonia, where companies are rated based on various criteria such as turnover, operating profit, growth, profitability or a combination thereof. It’s also possible to look at equity or share value, which would allow an assessment of the market capitalization, however, this is not our goal. In the TOP 101 we take a holistic look at the value of an enterprise and its importance to the Estonian economy, regardless of capital structure. Self-funding and loans make up the capital the entrepreneur has available to create added value. That money is used for investing in the running of the business, supporting research and development, upskilling staff, paying taxes and participating in the country’s economy in other ways. If an entrepreneur builds a factory, then the market value of this will be the same regardless of the source of funds. Market value depends on the efficiency and success of the factory and the added value it can create. Financial services companies (e.g. banks and insurers) are an exception, in which case equity value is considered. This is because due to the nature of the industry, it’s not possible to objectively assess enterprise value in a way that is comparable to companies in other industries.

Choice of assessment criteria

There are several ways to assess companies. For compiling the TOP 101 ranking, we chose the comparable trading multiples method, also known as the market-based approach. This has several advantages over other methods, the main one being that it is based on market statistics and company annual reports available publicly – i.e. factual information. We do not add predictions or our own views, therefore this method is minimally subjective. It’s for this reason that the ranking may not include start-up companies whose valuation based on rounds of funding is built mainly on future potential. The method is also relatively simple and can be used even if there is limited information available.

Selection of enterprises         

The enterprises are first ranked based on revenue and operating profit. The exceptions are financial services providers who are assessed based on equity value. If the company has prepared and submitted a consolidated annual report, the report is used as the source of data. An initial list of 300 companies is compiled and the largest financial services providers, based on equity value, are also added.

Analysis of financial reports

At this stage, the annual reports from the last three years of companies in the initial list are analyzed. The main indicators considered in the analysis are revenue, EBITDA (operating profit before interest, taxes, depreciation, and amortization), equity and assets. Initial EBITDA is calculated by adding depreciation and amortization to operating profit from which one-off or non-operational profits/losses as well as any accounting adjustment related profits/losses, which doesn’t result in actual cash flow (such as profit or loss from sale or revaluation of assets), are then removed. Companies are removed from the initial list if:

- the company is involved in an insolvency or restructuring process or has been deleted from the register;

- the company’s annual reports were not available in the Central Commercial Register at the time of compiling the TOP 101; or

- the enterprise has only registered a holding company in Estonia and the volume of business in Estonia is very low in comparison to the overall business.

Evaluation of multiplier calculation

Three evaluation multipliers are used in pulling together the TOP 101 ranking. In the evaluation of financial services providers - stock market capitalization to book value (P/B), and in the evaluation of other companies - enterprise value to sales (EV/S) and enterprise value to EBITDA (EV/EBITDA). Multipliers are calculated per industry and industries are classified using the GICS - General Industry Classification Standard. Companies listed on European exchanges are used for comparison. The data required to calculate the multipliers is sourced from the S&P Capital IQ database.

Enterprise assessment

Companies (other than financial services) are assessed based on EV/S and EV/EBITDA multipliers. Financial results (revenue and EBITDA) are multiplied by the relevant multipliers to reach a weighted average. The weight of the multiplier will depend on how stable it is across the industry. For example, the higher the instability of the EV/EBITDA multiplier in the relevant sector, the lower the weighting of the multiplier. After this, the calculated results of the last three years are used to arrive at an overall weighted average enterprise value. Weighting assigned: year under review (last year) 50%, -2 years 30% and -3 years 20%. For financial services providers, the market value of equity is determined by multiplying the P/B multiplier with the book value of equity.

Corporate governance score

The value calculated based on financial results is then supplemented with a qualitative assessment to arrive at a final enterprise value figure. The qualitative assessment can impact the final enterprise value by up to 20% according to a 100-point scale expressed coefficient. The qualitative assessment of companies is carried out by Nasdaq. The following factors are evaluated: transparency of ownership structure, quality of information disclosed in financial statements, communication about financial results and the range and quality of information available for access on the company website.

Sulev Raik, Partner at Prudentia