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