TOP 101 methodology


Preparation methodology of TOP 101 of Latvia’s most valuable enterprises

Overall comments

  • Values of TOP 101 of Latvia’s most valuable enterprises reflects the enterprise value, e.i., value of enterprises future money flow collectively to all company’s finance providers (shareholders/members and financial creditors). The exceptions are banks and insurance companies; their evaluation reflects the company’s equity value, because it’s not possible objectively to provide enterprise value that could be comparable with other TOP 101 participants.
  • It is important to separate company's business value from the equity value. Business value reflects added value that company creates, regardless of its financial structure and unused financial resources during basic operating activities, while the equity value reflects the value created by the company's owners, which is adjusted taking into account the company's capital structure (e.g. amount of liabilities) and basic operating activities.
  • Each company's business value (banks and insurance companies - equity value) is determined using comparable trading multiples method and adding company’s transparency and corporate management risk assessment in TOP 101 making context. The choice of method is motivated by the following considerations:
    • it is consistent with the company's assessment of economic activity;
    • in the case in need to obtain an indicative assessment of company outside a particular context (for example, it’s not planned to use assessment to evaluate corporate finance transactions), this method allows to obtain indicative evaluation of the company relatively quickly;
    • method allows the use of a relatively narrow range of publicly available information;
    • taking into account all most important TOP 101 parameters and constraints, comparable trading multiples method allows to obtain a more objective assessment of the companies – in process are used the actual parameters of the market, they are isolated from certain specific aspects of the company and activated in a particular moment of evaluation.
  • “Prudentia” and Nasdaq Riga professionals perform the analysis.
  • Enterprises are being evaluated, based only on publicly available information.

Step 1. Initial selection of the companies. 

  • Taking into account the ongoing TOP 101 project development, including the development of the methodology, this year the biggest emphasis is put on improving access to business ranking. This helps to reduce the risks that from the original lists can fall out relatively large companies (in some cases – significant market players) - mainly due to fluctuations in some single financial year in result of EBIT.
  • In the first step initial business listings are selected (Latvian and Estonian companies - from enterprise register, Lithuanian companies - from databases, which compiles information on companies and their business performance), which is ranged by one of the following financial ratios:
    • flow rates: (1) EBIT (profit before financial positions and corporate income taxes) and (2) the net turnover;
    • balance sheet indicators: (1) total assets and (2) equity.
  • The list of companies that are ranged by EBIT, doesn’t include banks, insurance companies, asset management companies and similar businesses, for which it’s not possible to calculate objective and comparable to other companies EBIT ratio and which are evaluated using the equity value rather than business value. Lists of such financial service providers are supplemented with data from the three Baltic States financial market regulators and central bank websites.
  • Each list contains of the following data about 300 Latvian, 100 Lithuanian and 100 Estonian companies: net sales, EBIT, equity, total assets, net profit, cash, consolidation of the annual report, information about the company's burden.
  • If the companies listed have prepared and submitted the consolidated annual reports, the data is collected from them (the subsidiary company, which is already included in the consolidation, are excluded from the list). Otherwise the parent company's annual reports are used. Holding companies are evaluated only if the consolidated annual report was available.
  • For each country is summarized an integrated initial business list (250-300 enterprises for Latvian top, 40 – for Estonian top, 25 – for Lithuanian top), choosing the highest ranking of the company's flow characteristics, which have been previously obtained by consolidating information from individual lists into one list and arranging after each of the flow rates. For example, if company ABC took the 50th position in terms of net sales, 15 - after EBIT, the integrated rank is calculated:

Integrated rank is min(A = 70, E = 15) = 15, or, verbally saying, companies are selected and awarded with the top position of the two flow rates, in this way not missing significant companies, which showed a relatively poor EBIT performance this year, and companies with relatively small turnover but high EBIT performance.

In addition, must be taken into account that the list of the companies is updated, independently examining lists of balance sheet indicators, in this way reducing the risk that from in-depth analysis falls out relatively large companies.


Step 2. Financial review analysis of integrated list participants

  • For enterprises that are in step 1 prepared three integrated lists, is summarized financial data from last three completed financial year reports (2011. – 2013.):
    • Latvia: 250–300 enterprises from integrated lists + the largest financial services providers in terms of assets and equity volume;
    • Lithuania: 25;
    • Estonia: 40.
  • Mains indicators for which the data are collected:
    • net turnover;
    • EBITDA (profit before depreciation, amortization, financial positions and corporate income tax) - this is the most important indicator in assessing the TOP 101 participants that aren’t financial service providers (which are valued by the equity value), and this indicator is a separate assessment methodology;
    • equity;
    • total assets.
    • net turnover;
  • EBITDA calculation is based on the following steps:
    • at the beginning is calculated so called initial EBITDA

Initial EBITDA = profit before taxes, ADDED BACK financial costs, TAKEN OFF financial income, ADDED BACK depreciation and amortization expense.

  • In step 1, obtained result is supplemented with an additional adjustments (depending on the situation). For example:
    • taxes are deducted from profit loss calculation, which refers to economic activities, but doesn’t apply to corporate income tax;
    • the received dividends and similar positions that are related to the financial performance in other companies are (that aren’t consolidated in the company's annual reports);
    • deducted are other positions which could be considered as extraordinary - uncharacteristic basic operating activities positions, especially if they are without real effect on operating cash flow.
  • From the list was excluded enterprises with following features:
    • based on the information from the available last financial year report or report on evaluation date - the company has been in involved in insolvency process, judicial or non-judicial protection process;
    • holding company with or no subsidiaries, which operate in one of the GICS (General Industry Classification Standard - an overall industry classification standard) classification sectors, if holding company hasn’t submitted the consolidated annual report;
    • a significant part of the company's revenue is generated by revenue from one,  individual project or contract, as well as income from subsidies;
    • the company has not submitted annual reports for at least two of the last three financial years (banks, other credit institutions and insurance companies - for the last financial year).


Step 3. Evaluation multiplier calculation

  • In TOP 101 are used three evaluation multipliers:
    • in evaluation of banks, insurance companies and other financial service providers – the stock market capitalization vs shareholders' equity (M/B);
    • evaluation of other companies - company value vs net sales (EV/S) and enterprise value vs EBITDA (EV/EBITDA).
  • Company comparative multipliers are gained by creating business sector comparable groups (as already mentioned GICS classification), which includes the listed companies in European exchanges, using S&P Capital IQ database and calculating the median. In addition, in each sector the level of multiplier instability have been evaluated, which determines the multiplier weight in overall evaluation.

Step 3. Enterprise evaluation

  • All businesses that are evaluated using multipliers EV/S and EV/EBITDA, financial ratios of last three years (net sales and EBITDA) were multiplied with respective evaluation multipliers. In the weight choice of TOP 101 were taken into account investors' views on how stable a particular indicator reflects true value of the company. To determine this was used the level of multiplier’s relative instability – for example, the more unstable is EV/EBITDA multiplier in certain industry selection, the smaller is the weight of multiplier.
  • During the next step the weighted average enterprise values are obtained by multiplying the values that are calculated based on the last three fiscal years period results. Compared with previous year TOP 101 (in which was used one particular historical year’s results), thus partly are aligned evaluation fluctuations due to changes in the individual financial year results.
  • Equity values of banks, insurance companies and other financial service providers are determined by multiplying the M/B multiplier with equity balance indicator (at the end of financial year 2013).
  • Part of the value of each company's value makes Corporate Governance practice evaluation - current business model’s transparency and key management risk assessment. These factors are also taken into account in shaping the top, and they may influence the evaluation of each company up to 20% according to in a 100-point scale expressed coefficient, that using publicly available indicators, evaluates Nasdaq Riga. This indicator describes the company's overall transparency level, a variety of management risks and quality of information included in financial reports. Companies are evaluated after 15 criteria in four different groups: financial sector companies, listed companies, national and local authority companies, other companies.  Following factors are evaluated: political independence, the opportunity to clarify the company's owners, company’s executive and administration body’s direct relationship with major owners and possible risks, quality of information included in financial reports, public communication quality about financial results, access to information in company’s website about company’s officials, financial results, company’s structure, vision, mission.