Home Investing What is the Enterprise Ratio, the Robur–M and the Altman-Z Score

What is the Enterprise Ratio, the Robur–M and the Altman-Z Score


The enterprise ratio is a valuation metric used by investors to gauge the attractiveness of a company as a potential takeover. It roughly measures the amount of time it would take for the acquisition to pay off its costs (therefore the lower the figure the better).

The standard formula for the enterprise ratio is the enterprise value divided by EBITDA. At Robur we choose not to use EBITDA, but rather divide the enterprise value by operating income. This is because not everyone reports EBITDA – it is not a requirement by the GAAP.

The formula for the enterprise value (EV) is as so:

EV = (market cap + long term debt) + (total assets – total liabilities – shareholder equity) – cash

To get the enterprise ratio, simply divide the EV figure by operating income. An example using 3m is shown below:




= (108,240,000,000 + 4,326,000,000) + (33,550,000,000 – 15,602,000,000 – 17,502,000,000) – 2,581,000,000

= 112,566,000,000 + 446,000,000 – 2,581,000,000 = 110,431,000,00

3M‘s latest reported annual operating income was $6,666,000,000

110,431,000,000/6,666,000,000 = 16.56. This means that it would take almost 17 years to pay off the acquisition cost of 3M – making it an unlikely takeover target.


Altman Z vs Robur-M Score

Originally published in 1968 by Edward Altman, an assistant professor of finance at New York University , the Altman Z is a formula for predicting the probability that a company will go into bankruptcy within 2 years.

Mr. Altman‘s formula is as follow:

Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E


A = Working Capital/Total Assets
B = Retained Earnings/Total Assets
C = Earnings Before Interest & Tax/Total Assets
D = Market Value of Equity/Total Liabilities
E = Sales/Total Assets

The Robur-M is very similar to this ratio, except we switch out retained earnings for shareholder equity. This is because retained earning does not take into account goodwill, and the risk is that companies who ‘buy‘ earnings through acquisitions may not be accurately reflected. Another small tweak we make is to use operating income instead of EBIT. Therefore the Robur M ratio is as follows

M-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E


A = Working Capital/Total Assets
B = Shareholder equity/Total Assets
C = Operating Income/Total Assets
D = Market Cap/Total Liabilities
E = Revenue/Total Assets

Example (we will use 3M again)





(1.2 x (5,235/33,500)) + (1.4 x (17,502/33,500)) + (3.3 x (6,666/33,500)) + (0.6 x (108,240/15,602)) + (30,871/33,500)

= (1.2 x 0.156) + (1.4 x 0.522) + (3.3 x 0.199) + (0.6 x 6.938) + (0.922)

=0.1872 + 0.7308 + 0.6567 + 4.1628 + 0.922

= 6.65

But what does this number mean? Mr Altman believed that a score of 1.8 or below stood a high risk of bankruptcy, any score above 3 meant that the company is deemed as safe. The Robur M is pretty close, anything below 2 is a big red flag, and anything above 3 is reasonably safe. Therefore 3M‘s score of 6.65 is not unsurprising, as for such a large cap, stable company we would not expect there to be much risk of insolvency in the near future.