Return on Enterprise Value (ROEV) – Best Stock Valuation Calculation

by KenFaulkenberry

in Investment Analysis

Enterprise Value

Return on Enterprise Value - ROEV

Return on Enterprise Value (ROEV) is a stock valuation formula used in value investing strategies. Combining enterprise value and net cash flow into a ratio provides a powerful tool for investment analysis.

Return on Enterprise Value

Return on Enterprise Value (ROEV) is net cash flow divided by enterprise value. I believe it is the single most valuable stock valuation calculation in the investment universe. An investor should never make investment decisions based on a single calculation, but if I could only use one stock valuation formula it would be ROEV.

Stock Valuation Calculation

Net Cash Flow (NCF) divided by Enterprise Value (EV) = Return on Enterprise Value (ROEV)

Use Net Cash Flow as the numerator and Enterprise Value as the denominator to calculate the Return on Enterprise Value.

(These metrics can be found on investment sites such as Yahoo-Finance. After getting a stock quote, both Enterprise Value and Cash Flow can be figured from “Key Statistics”.)

Compare and Value Company Shares

Enterprise value provides the most valuable business valuation metric. One of the advantages of enterprise value is that it equalizes companies with different capital structures by making adjustments for debt and cash. This provides equality for comparing the performance of companies with very different balance sheets. By adjusting for debt and cash, enterprise value provides the total value of a company as if you were purchasing the whole business at the current market value.

Net cash flow provides the most important financial income metric: How much cash is generated from operations. Profits can be deceiving due to accounting entries. Cash flow is real and is hard to manipulate.

Combining cash flow and enterprise value as a ratio produces Return On Enterprise Value.  ROEV provides the analyst the rate of return on the total value of the business (EV). In other words it measures, as a percentage, the real amount of money  (cash flow) being produced today (not accounting profits) based on what the business is valued at today (not book value).

What do you think of Return on Enterprise Value as a value investing strategy?

Related Reading: Investment Analysis: High Probability Strategies

Return on Enterprise Value (ROEV) Backtest – Fat Pitch Financials


Written by KenFaulkenberry

KenFaulkenberry

AAAMP Blog by Ken Faulkenberry
Ken Faulkenberry earned an MBA from the University of Southern California (USC) Marshall School of Business with an emphasis in investments. Ken has 25 years of investment experience and is dedicated to helping people with self-directed investment management through the Arbor Investment Planner. His asset allocation strategies have an outstanding performance record.
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Dave Sallee

I use FCF instead of NCF. Every company has to spend money just to maintain its ability to generate current output of products. But this varies alot depending on the type of company. The less spent on capex for operations, the better.

What is your opinion?

KenFaulkenberry

Both FCF and NCF are valuable metrics. Personally, I like NCF the best. I want to see what the company is generating in cash flow. What they do with their cash flow is the next step (invest for the future, return money to shareholders, etc.). Thanks Dave.

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