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Every investor has a favorite website for running stock screens using key metrics and ratios. However, if you don’t have to, why pay for it? That’s why Yahoo Finance’s Stock Screener is my current favorite tool for screening stocks. Sadly, the Reuters Powerscreener (which was a favorite of many) looks like it is no longer available to new users. So, Yahoo takes the #1 spot. We’ll walk you through a sample screen below. (more…)

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Debt is an important factor to consider when determining whether or not to invest in a company. Like the enterprise value metric, the enterprise multiple accounts for the impact of long term debt held on the balance sheet. At the same time, it serves as an “apples to apples” gauge of value for international companies. This is because it is calculated using “earnings before interest, taxes, depreciation, and amortization” (or EBITDA for short).

By definition, EBITDA excludes any taxes (which may vary significantly between countries due to differences in tax policy). This allows investors to make more reasonable comparisons between, for example, a US firm and a company based in the UK. In addition, investors on the lookout for companies which may be acquired (since the stock of the acquired company usually enjoys a nice premium) can use the enterprise multiple as a stock screen. The enterprise multiple is defined as:

EM = Enterprise Value / EBITDA

A low enterprise multiple, or a low enterprise multiple vs. industry peers, may be a sign that a company is undervalued.

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There are a number of ways to estimate the market value of a company. The most common approach is to consider market capitalization (which is simply share price multiplied by the number of shares outstanding). However, this approach only takes into account the equity of the firm.

Investors should also be concerned with the impact of debt on the company. Enterprise value, which is an estimate of “takeover” cost (i.e., the amount it would cost another firm to acquire the company), accounts for the offsetting effect of long term debt as well as cash reserves. The basic calculation is:

EV = Market Cap + Long Term Debt - Cash

More specifically:

EV = Market Cap + Long Term Debt + Minority Interest + Preferred Shares - Cash & Cash Equivalents

Note that minority interest and preferred shares are typically included as well (they have the same effect as Long Term Debt) along with cash equivalents (which have the same effect as cash). Long term debt would be a “cost” to the acquiring company since it would have to pay this money back. The cash component, however, offsets this cost (since the acquirer now owns these cash reserves).

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