Putting a price on a company - methodology behind TOP 101
Sulev Raik
Partner at Prudentia Tallinn
TOP 101 ranks Estonia's most valuable companies based on a number calculated by an agreed methodology. Essentially, this is a price tag attached to the respective company. The methods used in compiling TOP 101 ranking asses the value of the company's business, i.e. how much the company generates value in its business for owners and creditors. The exception is financial service providers (e.g. banks and insurance companies), where we assess the value of their equity. This is because, due to the specific nature of the financial sector, it is not possible to objectively assess the value of the entire company in such a way that it is comparable to companies operating in other areas: banking is a highly leveraged business, and the structure of banks' liabilities is not comparable to that of companies producing non-financial goods and services.
It is therefore necessary to distinguish between the value of the company as a whole and the value of equity capital separately. Simply put, the value of a business is the sum of equity value and borrowings less cash and cash equivalents.
We calculate the value of the company using the comparable trading multiples method. Comparable companies are companies listed on European stock exchanges, except Russian companies as their market value may be distorted due to sanctions and the isolation of Russian financial markets. For conventional (non-financial) companies we use the corporate value/EBITDA multiplier and for financial service providers we use the P/B multiplier. For banks we also use the Baltic and Scandinavian banks as the peer group and adjust the value if their ROE differs significantly from the average.
For conventional companies, when determining their value, we take into account the financial results of the last 3 years and assign weighting to them. For example, this year's TOP 101 ranking is based on the financial results for 2020-2022 (based on the reports submitted to the Commercial Register) and the weighting of the value calculated on the basis of the 2022 results in the final value is 50% (2021: 30 % and 2020: 20%). The objective is to even out large fluctuations in corporate value over the years, which may be due to changes in the economic environment and have a temporary nature. In recent years, companies' financial results have been affected by the COVID-19 pandemic and Russia's military aggression against Ukraine. The latter affected the Estonian industrial companies in particular in terms of access to raw materials. While in the case of machine building and metals companies it was limited to short-term shock and forced them to revise their supply chains, for the timber industry the impact is longer-lasting and even structural.
The downside of this 3-year approach is that this puts growth companies at a disadvantage. If we used only last year's results to calculate value, companies that grow faster than average could place somewhat higher in the ranking.
Last year we decided that in case of listed companies, we would take their stock price and calculate the company value on its base. To put it simply, we added to the company's stock price its net debt, ie borrowings less cash and cash equivalents. We do not perform a separate corporate governance assessment for listed companies, as we assume that investors have already assessed them, and this is reflected in the share price. The assessments on the company's transparency and sustainability were provided by Nasdaq Tallinn. This component may affect the final value of the company by 20%. Somewhat surprisingly the average score of the companies in the ranking this year is 27.5 while last year it was 35.5. In this category, the ranking is topped by SEB that scored 95 points out of 100.
