4 ms·
I think market cap is a bit misleading. Enterprise value (market cap + net debt) is a more consistent valuation measure. The house analogy is a helpful one. Le
by wavefunction22 4y ago
I think market cap is a bit misleading. Enterprise value (market cap + net debt) is a more consistent valuation measure.
The house analogy is a helpful one. Let's say I buy a million dollar house but I only have $100K of equity in it so far. My market cap is $100K and my debt is $900K. I'd argue that the house is still worth a million dollars.
This is important here since Tesla has much less debt vs. the rest of the auto industry.
- 300bps 4y agoMarket cap should take into consideration debt and all other valuation variables of a company. It’s literally what people are saying the company is worth. If you subtract debt from market cap to get the value of a company you’ll be subtracting debt twice. Your house analogy and the way you explained it does not make sense to me. Since market cap is what the market is saying a company is worth, it isn’t right to equate that to the “$100k of equity” in your example house. It’s more correct to equate it to the $1 million value the house has.
- wavefunction22 4y agoMarket cap isn't saying what the 'company' is worth. It's a measure of the equity portion of the ownership of the company. It excludes the debt portion of the ownership. Right now GM has an enterprise value of $130B. That means it's expected to spit out $130B of cash over its lifetime (discounted to a present day value). But the market cap is only $50B. Meaning $80B of that future cash will go to GM's lenders. It of course feels super counter-intuitive to add debt (which feels like it should be a negative) to the valuation. But I always felt the house analogy gives an intuitive everyday example.
- tsimionescu 4y agoBut they also have far, far fewer assets, and even farther fewer actual cars.