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Market cap is deflated by debt, pension obligations etc. Many of the big US car makers, apparently, pay pensions from their own balance sheets. 'Enterprise val
by rich_sasha 5y ago
Market cap is deflated by debt, pension obligations etc. Many of the big US car makers, apparently, pay pensions from their own balance sheets.
'Enterprise value' is the metric, derived from market cap, that corrects for it. "How much is this company's living organism worth, without caring about debts etc.". There Tesla, and Rivian presumably too, look less good, since their EV is not encumbered by decades of debt and pensions.
Still...
- rsj_hn 5y agoMarket cap = number of shares * price per share Enterprise value = market cap + debt The thinking is that to buy the company you need to buy the equity and then retire the debt, therefore when a company takes on more debt this increases enterprise value. Another way to think about it is the liability side of the balance sheet. You make $20 in debt and $30 in equity so your total liability is $50. Then market cap = 30 and enterprise value = 50. > Many of the big US car makers, apparently, pay pensions from their own balance sheets. No, pensions are paid out of pension funds, which is an off-balance sheet liability. The only way it kinda indirectly would show up on the balance sheet is if the automaker got sued for underfunding their pension fund and had to issue some debt to make up the shortfall.
- atombender 5y agoYou're thinking of market value, I think. Enterprise value is primarily (market value + debt - cash). Market value does not include debt.
- rich_sasha 5y agoYeah, so if I have 2 companies with same intrinsic value but one with, one without debt, the one with debt has lower market cap. Hence “deflated”.
- bdcravens 5y agoNot explicitly, but it can influence the price, in turn influencing the market value.