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BFS - An update



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By cjack

Posted: Thursday Aug 23 8:40:23AM 2007

Following the comments posted below, I often use the enterprise value (EV), to compare companies with vastly different balance sheets, instead of market cap. i.e., use EV/E instead of P/E, or EV/CF instead of P/CF. I compute EV as EV = (Market Cap + Total Net Debt) In my calculation, if the company has no debt and cash, the "Total Net Debt" becomes negative (equal in magnitude to cash), making the EV less than the market cap. Depending on the industry and other specifics, I may exclude some working capital items (e.g., inventories) from the cash/debt calculation. For example, I find EV/CF a much better comparison tool when oil and gas juniors trade in the P/CF of 2-5 range, and can have Debt/CF in the 0-3 range. Cjack (no, not Broke!)

By woodstove

Posted: Wednesday Aug 22 3:58:22PM 2007

I agree in general. Try to estimate excess cash, ie what is surplus to needs of the business, when doing valuations. Some businesses have high return on invested capital, so it makes sense that they carry mixture of debt + equity to finance their capital ... they can have excess cash in the form of unused debt capacity, which enters into valuation which a buyout might put on the company. Other companies have low return on invested capital, so debt makes no sense and any debt they have would reduce apparent excess cash; ie, they may have cash but it is not really "excess" cash. One other aspect ... cash in company, if paid out via a dividend, is worth less than face, because it gets taxed.

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