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You have to be careful when making a blind comparison, though, because a lot of debt VW and Toyota have is related to their financial service divisions. They're

You have to be careful when making a blind comparison, though, because a lot of debt VW and Toyota have is related to their financial service divisions. They're going to receive lease payments to service it. If you were evaluating a bank that had $1tn in deposits and issued $800bn of home loans and had $200bn in cash, the $800bn figure of debt minus cash just doesn't mean that much, and people don't typically calculate EV for banks. So say Tesla buys that bank - does their EV double to ~$2tn? IMO, the only meaningful way to compare EVs is to unwind the financial divisions valuing them like financial companies, then compare what's left. It's not all rosy, though, because even after unwinding financial services from these companies they've still got a lot of debt. And EVs do pose a risk that the value of the leased ICEs cars will plummet. If it happens very rapidly, that could well be an existential threat.

bryanlarsen 6y ago
That's a great example. They have $1T in debts (the deposits), and $1T in assets (the cash + home loans owed them). To simplify our example, let's assume that some of those home loans are in trouble so the "continuing business" part of the company is worth $0, that the expected profit from those loans exactly balances the expected interest expenses on their deposits. So their market cap is $0. Market cap is $0, EV is $800B. So is the company worth $0 or $800B? *Both answers are right*. You have to specify worth to who before getting an answer. To the economy it has almost a trillion dollar impact, to an investor it's worthless.
- reitzensteinm 6y ago
  But in the case of a car company owning a bank, neither market cap or EV are good answers for comparison. The first lets debt cloud the intrinsic value of the manufacturing operation, and the second dumps the value of six months worth of production onto the calculation for no real reason. VW has 133 billion euros of receivables for its leases. If we talk about Tesla's worth in comparison to VW by comparing EV, we're essentially discarding that line item - worth double the market cap of GM. And as I said above, if Tesla buys this $0 market cap $800bn EV bank, why should it change the relative value of the car companies to each other? Using your method, it does. To put it another way, when Tesla took on $500m in debt to offer Model 3 leases - did the business really change in any material way? If they financed $10bn 3/Y leases this year - would the value of the company bump up by 1% compared to if they used a leasing partner?

bryanlarsen 6y ago

That's a great example. They have $1T in debts (the deposits), and $1T in assets (the cash + home loans owed them). To simplify our example, let's assume that some of those home loans are in trouble so the "continuing business" part of the company is worth $0, that the expected profit from those loans exactly balances the expected interest expenses on their deposits. So their market cap is $0. Market cap is $0, EV is $800B. So is the company worth $0 or $800B? *Both answers are right*. You have to specify worth to who before getting an answer. To the economy it has almost a trillion dollar impact, to an investor it's worthless.

reitzensteinm 6y ago
But in the case of a car company owning a bank, neither market cap or EV are good answers for comparison. The first lets debt cloud the intrinsic value of the manufacturing operation, and the second dumps the value of six months worth of production onto the calculation for no real reason. VW has 133 billion euros of receivables for its leases. If we talk about Tesla's worth in comparison to VW by comparing EV, we're essentially discarding that line item - worth double the market cap of GM. And as I said above, if Tesla buys this $0 market cap $800bn EV bank, why should it change the relative value of the car companies to each other? Using your method, it does. To put it another way, when Tesla took on $500m in debt to offer Model 3 leases - did the business really change in any material way? If they financed $10bn 3/Y leases this year - would the value of the company bump up by 1% compared to if they used a leasing partner?