Pulling together all sorts of league tables and rankings, particularly where it requires gathering and analysing large quantities of various data, is undoubtedly a complex but worthwhile undertaking. The more data that is used and the greater the variability amongst those inputs, the higher the margin of error i.e. impacting the statistical significance of the results. As we can see from the events unfolding around us today, our environment can also rapidly and significantly change, causing a detrimental impact on the value of data sets that are based on historical information. Even so, I’d like to recognise Prudentia’s initiative of putting together a ranking of the most valuable companies in Estonia, similarly to what has been done for years for Latvian companies. I’d also like to recognise Prudentia’s approach to Enterprise Value (EV) where, unlike many other rankings, the focus is not on equity value but on the so-called total value for all investors. Effectively, this ranking is trying to assess the market value of the capital invested by all investors. To put it simply – it’s the notional market value of a company’s equity, loans taken, bonds issued, subordinated liabilities etc. combined. Naturally, the results are based on an agreed methodology and generalisations made when inputting data. Whilst one could complain that the information this is based on is now largely out of date or irrelevant, the ranking still gives an overview at a point in time and will hopefully set up a basis for a timeline which will have increasing analytical value in the future. All similar broad-based rankings that hold both listed and unlisted companies, are based on data on historical performance rather than future financial forecasts. Therefore, as long as the ranking methodology remains consistent, I do not consider the timing of the data to be an issue at the moment.

The use of evaluation multipliers (EV/EBITDA, EV/Sales) differentiated by industry can be considered one of the strengths of the methodology that is used by the TOP 101 ranking. Based on the specific nature of each industry around growth, capital structure, overall level of risk etc., the relevant multiplier could vary significantly. Hence, the use of industry-specific multipliers will give a much more accurate picture at a point in time than a universal agreed multiplier. The quality of results is further enhanced by the use of two separate ratios and the use of company financial results across several years, which reduces the impact of any one-off circumstances on the enterprise’s overall value. The addition of so-called ’soft values’ such as an assessment of the company’s openness and transparency also adds an additional dimension to the results. One might question the inclusion of financial services enterprises in this TOP 101 as due to the nature of the industry, a calculated equity value is used for the assessment and this may not give a fair picture in comparison to the enterprise value of companies in other industries. It’s natural that a ranking based on historical financial results does not include so-called ’unicorns’ and other start-ups, but this only makes it more interesting to see these companies progress through the ranking in the future.

At this point, I’d also like to point out a couple of fundamental considerations one should keep in mind when reading this ranking. Enterprise Value (EV) is not always applicable as an absolute figure describing the overall value of an enterprise. Rather, it’s mainly used as an internationally recognised analytical concept used in assessing enterprises. After all, the main expressions of this indicator are the various ratios that are derived by comparing EV to profit or cash flow indicators. It’s also important that the profit or cash flow indicators themselves cover financial operating results for all investors. For example, EV/Sales or EV/EBIT apply but EV/Net profit would not be an accurate representation of the situation. At this point, it’s also worth remembering the simplified main formula for EV, where EV=market value of share capital + market value of debt capital – cash and cash equivalents – financial investments. This shows that both money and financial investments are not considered as part of a company’s core-business assets for the purpose of EV. Based on this, we can conceptualise the difference between the market value of a company’s shares i.e. market capitalization and EV as follows: market capitalization reflects the value of all enterprise assets that are owned by equity investors whereas EV reflects only the value of the assets linked to the main operation of the business but across all investors. Therefore, it’s not unusual to see a situation where the EV of companies, that do not utilise their borrowing capacity and hold large cash reserves and/or financial investments, is much lower than the market value of their shares. Enterprises are usually bought and sold without assuming the debts and with optimal cash reserves. Calculating the EV, whether by using market multipliers or a discounted cash flow method, is often an important stage in stock valuation but is then mostly followed by various corrections and adjustments.

In theory, the market value of all financial assets reflects the present value of the cash flows these assets will generate in the future and looking at past results is of little importance. However, as we well know, forecasting is a difficult and underappreciated task, especially when it comes to future predictions. Results to date are and will continue to be the main starting point for assessing enterprise value. From this perspective, Prudentia’s new TOP gives a good overview of enterprises creating the most value in Estonia.

Sander Danil, Senior Analyst in the Institutional Brokerage Department at LHV Bank