Propeller Skies

Enterprise value is how much a company would cost to buy outright. Enterprise value is important for comparing companies against each other, because it accounts for debt and equity. While market capitalization is often referred to as how much a company is worth, this is a shortcut and ignores debt and cash on the books. Debt is a liability and cash is an asset. For example, if I sold my Acura on Craig’s List for $1,000 plus the remaining debt, the actual cost to the buyer would be $17,000 because he would have to pay off the remainder of the loan. In comparison, if I sold a file cabinet on Craig’s List for eighty dollars and the purchaser discovered a twenty dollar bill in the drawer, he would have effectively paid only sixty dollars.

The first step is to calculate the market capitalization, which is the share price times the number of shares out. Simple enough, right? Share price is highly variable, so I arbitrarily use the fourth quarter high for consistency when comparing companies within an industry and year over year. Generally, the high and low closing prices by quarter are in the 10-K somewhere, but some companies, such as Canadian National (CNI), are very unhelpful and refuse to publish this. Fucking Canadians. For number of shares out, I use diluted shares, found on the consolidated statements of income.

The second step is to add long term debt to the market capitalization. This is also known as debt due after one year and is found on the consolidated balance sheets. Alert Propeller Skies readers playing along at home can also add short term debt. I personally do not bother, but I do pay attention to trends in short term debt to suss out anomalies.

Finally, subtract the cash money. Cash and cash equivalents are found on the consolidated balance sheets.

Enterprise value by itself is not particularly useful. Stay tuned to find out how to combine enterprise value with other performance metrics to create informative measures. We might get nuts and leverage a few synergies up in this bitch, as well.

For further reading, see the next post in the series: Enterprise Value to Free Cash Flow, the previous post in the series: Free Cash Flow, or start at the beginning with Railroad Performance Measures: Operating Ratio.

This entry was posted on Thursday, January 24th, 2008 at 23:03 and is filed under Company Analysis, Get Rich or Die Trying. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.