Enterprise value/EBITDA, or enterprise multiple, is used by private equity firms to determine the approximate number of years it will take to recover the cost of purchasing a company. Four or five is usually the magic number, as those firms with an enterprise value near or below four or five are considered attractive takeover targets. What is interesting to me is that if the enterprise multiple goes to one or below, that in theory means that the firm can pay itself off (its salvage value) with a years worth of earnings, given that earnings do not decline. Below is two companies with enterprise multiples of less than one. Both have strong brands and could add to my list of potential turnaround plays.
Nokia (NOK) - Enterprise multiple is 0.54. Thus, unless earnings decline more than 46% during the course of the year, it will be able to pay off itself after a year's earnings. This leads to the question: will earnings decline by more than 46% in a year? Quarterly revenue declined -29.3% year over year. Analysts expect earnings to start to pick up as the year goes by. Currently, revenue is $43.76 billion, debt is $6.05 billion, and market cap is $7.12 billion. Nokia still had a 40.3% worldwide mobile device market share in early 2012.
Research in Motion (RIMM) - Enterprise multiple is 0.96. Thus, unless earnings decline more than 4% during the course of the year, it will be able to pay off itself after a year's earnings. Quarterly revenue declined -42.70% year over year. Analysts expect earnings to start to pick up as the year goes by. Currently, revenue is $16.34 billion, debt is zero, and market cap is $4.25 billion. Research in Motion still had a 13.4% smartphone market share as of February 2012.