5 ms·

Is Tesla more valuable than Toyota?

36 points by calpaterson 3y ago

DarkNova6 3y ago
This blog post is not about the "inherent value" of Tesla, but more a summary of "Enterprise Value" as defined by: "enterprise value = market cap + borrowings - cash" It's neat and not too long.
- franciscop 3y ago
  It's a bit hard for me to wrap my head about this "borrowings" as being part of the positive part of the equation. I understand that if you want to buy the company, then you need to pay that off, but is that really "value" in the way the article says to compare companies? - Imagine a company with 0 market cap and 0 cash, but 100M in debt. That company would be "enterprise valued" at 100M. - How can you compare that to a different company, let's say at 100M market value, with 0 debt and 0 cash and say they are the same for "enterprise value"? - Or to go even funnier, an arbitrary high market value, let's say X + 100M, with an arbitrary large amount of cash, let's say X, and say that both of those companies have the same "enterprise value" as one company that has 0 market cap and 0 cash but 100M in debt? When trying to get a "peasant estimation" of how big a company is (not in a "how much it'd cost for me to buy it" way), which is what the article is trying to argue, I'd say that it should be "market cap + cash - borrowings". Or maybe not even include the cash and borrowings, or do some more advanced calculations I don't know about, since the market probably accounts for those indirectly on the market cap!
  - epolanski 3y ago
    Replace value with price and will make sense. enterprise price = market cap + borrowings - cash equivalents
  - thrdbndndn 3y ago
    The equation is for more for "cost to buy". For your company A, you need to pay 0 to buy all its share, and also pay 100M to the lender to have full-control of the company. For your company B, you need to pay 100M to buy all its share, and also pay 0 for the debt. So they are both going to cost 100M for you as potential buyer. To expand a little bit, actually the "cost to buy" should exactly be how "valuable" it is. But why does it feel counterintuitive? Because when we're thinking about buying something, we usually don't really logically. Say you want to buy a car at $10000. But it also has a broken AC and you have to fix, which costs you $1000. At the end of the day, to buy a "car with a working AC" you paid $11000. That's the value of the car. But most people will think they "spent $10000 to buy car that actually only worth $9000". Is that true? For a totally fair market, you CANNOT buy the same car with working AC for $10000. It would be priced as $11000. Same goes for the company -- a company the has exactly "same" inherent value", whatever that means, but no debt, would have higher market value than the one with. So the market value, at least in theory, already reflected that difference. Hence you can add it together with the debt to get its "true value".
    - franciscop 3y ago
      I had to re-read this few times but I think it makes sense now. So what you are saying is, that if a company goes into debt, the market will also lower its valuation because it has debt, so we should not count this debt twice and that's why we need to add it up? I think we might be missing "assets" here? This is what still doesn't make sense for me: - A company just created (market cap 0) goes 100M into debt, and so has 100M cash, so it balances out to be 0. - However if that company uses those 100M cash to buy e.g. a factory, in this example what would happen? The Market Cap jumping to 100M doesn't make sense (since then the company would be "valued" at 200M), should we count the "assets" in the same way as "cash"?
      - thrdbndndn 3y ago
        > what would happen The market cap would not change. Enterprise value (which includes asset) = Market cap + debt (borrowings) - Cash. Therefore, market cap = enterprise value + cash - debt. So the company now would have EV of 100M and 0 cash and 100M debt. Its market cap stays at zero.
  - gruez 3y ago
    >- Imagine a company with 0 market cap and 0 cash, but 100M in debt. That company would be "enterprise valued" at 100M. The fallacy here is assuming that market cap is an independent variable, whereas in real life it's dependent on cash/debt. This makes sense, because a company loaded with debt would be less valuable to shareholders, since the debt has to be serviced which eats into future profits. If you set all 3 values arbitrarily, of course you're going to get absurd results. It's not any different than setting the side lengths of a right angle triangle to arbitrary values, then complaining that the Pythagorean theorem is broken.
    - franciscop 3y ago
      I did touch on this: "Or maybe not even include the cash and borrowings, or do some more advanced calculations I don't know about, since the market probably accounts for those indirectly on the market cap". If they are not independent variables, then it's also not fair to plainly add variables that depend on each other, since they will give a skewed value given that simple addition would assume they are independent.
    - hnbad 3y ago
      In other words market cap is assumed to be representative of the company's "actual value" (i.e. whether it is a good investment, profitable, whatever) and the other variables are meant to correct for factors the market cap presumably does not consider. But that is still counter-intuitive if we use an intuitive understanding of "value" (i.e. worth preserving/having/acquiring). The company in this example would have no worth but EV of 100M. If you buy it, you would have gained nothing and spent 100M. Realistically with (near) zero market cap the company is likely defunct or worthless, with zero cash and massive debt it's likely bankrupt. Realistically it's just a base "buying price". To fully buy out and own a company you would need to buy all the stock (market cap) and then pay off all the debt but you could use the cash for that. That's "value" in the modern economical "market price" sense, not in any intuitive sense. And it doesn't even mean paying that price would be a good investment because two different companies may have the same price but be hugely different in terms of potential ROI. Notably it only accounts for assets in the sense that the market cap might consider them - but we all know (do we?) that the stock market is not rational even when it can be rationalized otherwise we would be better at predicting it (notably a lot of "experts" perform worse than chance when trying to predict it). I guess if you wanted to account for value in the sense of "worth" the formula would have to be a multiplier of the share price as a share price of zero would presumably mean the market sees no use in it and the other factors don't matter (but then again there's no good reason why debt would factor into it positively because it's merely a proxy for capital based on the assumption that it's used for investments rather than cashflow).
  - madsbuch 3y ago
    The article touches fundamentals in capital markets: Stocks and bonds are essentially the same thing. The way to think about the enterprise value is: How much should I pay in order to gain exclusive control over the company and all its assets. > Imagine a company with 0 market cap and 0 cash, but 100M in debt. That company would be "enterprise valued" at 100M. In this case you would pay 100M to not have any liability to bond holders.
  - devoutsalsa 3y ago
    If you acquire the company, you assume it's debt, too. So that's a liability you assume, meaning you have to pay that on top of paying for the market cap of the company. You also get the cash, which is a reward for buying the company. So to buy the company and pay off all the debts. Example: - Company Stock is worth market cap of 2 billion. - Company has 2 billion in debt. - Company has 1 billion in cash. 2B (acquiring all the stock) + 2B (paying off all the debt) - 1B (cash in the bank) = 3B (enterprise value, aka the effective price to buy the company w/ no debt). Some people call the enterprise value the true price of the company.
    - nirvael 3y ago
      I think the confusion lies in the word "value". To use your example of Company, imagine another company (Company2) exactly the same as Company but without the debt. Enterprise value of Company is 3B, enterprise value of Company2 is 1B. But Company2 would clearly be preferential to acquire, because it has no debt, despite the much lower enterprise value. So enterprise "value" is not a useful measure of "value". Am I misunderstanding something here?
      - dagw 3y ago
        The part you're missing is that the 3 variables aren't independent of each other or of the underlying company. You'll never have two 'identical' companies that only differ in one of those variables. If company 2 has the same market cap with zero debt as company 1 has with huge amount of debt, then that implicitly means that the market values what company 2 does less. Perhaps they're in a market with lower growth or have a smaller market share or have a product with less upside potential or have huge lawsuit hanging over them. If company 1 and company 2 did the same thing and had the same profits and sales, but the only difference is that company 1 had a lot more debt, then the market cap of company 2 would almost certainly be higher than the market cap of company 1. In fact you could then use the Enterprise Value formula to work out what the market cap of company 2 'should' be.
        nirvael 3y ago
  - kjksf 3y ago
    Debt can be good when used as leverage. As I understand it, the majority of debt of car companies is used to provide leases. So e.g. GM borrows money at X% interest rate and gives credit to customers at X+Y%. Y% is their profit. So the bigger the debt, the more additional profit they make. This is also a ticking bomb because leverage generates more profit when times are good but increase losses when times are bad. That Y% finances the risk that a customer will stop paying. It also comes from GM being able to re-sell the car after the lease for more that it's worth ($PriceOfCar - $TotalLeasePayments). When bad times come, like in 2008, those companies are hit with double whammy: people have less money, so more people abandon the lease. And also buy less cars so car prices drop so re-sell value drops. So suddenly GM has losses and cannot afford the debt payments and that's how they go bankrupt.
  - deleted 3y ago
    [deleted]
  - rich_sasha 3y ago
    Consider the opposite. The company has a market cap of $100bn and $10bn in cash. If you buy the company out for $100bn, you automatically also get $10bn cashback. So it's more like it is worth 90bn, plus has some cash attached - but that bit is a wash. Debt is negative cash, so instead of subtracting it from market cap, you add it in.
  - throwaway190324 3y ago
    The submission doesn't state it explicitly, but a firm's debt enters its Enterprise Value at its market value, not its nominal value [0]. If an openly traded company (a company that has non-zero shares) had a market capitalization of zero dollars, the market value of a bond issued by it would be, most likely, also zero, or very close to zero, even if its face value were non-zero. If the market values a firm's stock at zero dollars because it isn't expected to increase in value nor to pay any dividends at any time in the future, then it wouldn't be expected to pay back any of its debt either, and so the market value of its debt would also be zero. Hope this makes things clearer. [0]: https://en.wikipedia.org/wiki/Enterprise_value#EV_equation https://en.wikipedia.org/wiki/Enterprise_value#EV_equation
Rygian 3y ago
One of those companies has been sinking money into the "Uncompetitive" section of the hydrogen ladder. The other hasn't. https://www.linkedin.com/pulse/hydrogen-ladder-version-50-michael-liebreich https://www.linkedin.com/pulse/hydrogen-ladder-version-50-mi...
laydn 3y ago
Isn't this a strange way to put Toyota to be "closer" to Tesla by "enterprise value"? I mean, if toyota had 1T USD debt, it's enterprise value would have been 1.25T, and it would have been more "valuable" than Tesla. But, how is that "better", if you want to invest in a company? I'm surprised TSLA is in such a good shape, debt-wise.
- ZiiS 3y ago
  If Toyota had 1T debt and kept its its current market value then it would have to be doing much better then it is. If it could not afford the debt it would be priced in. Companies with enterprise values higher then thier market values are not better investments.
- A_D_E_P_T 3y ago
  Somewhere towards the bottom, the post explains that "the price to buy the business and gain all its economic value is the enterprise value." So if you want to buy Toyota, and reap all of the profits, you buy all of the stock and all of its debt. Toyota and GM become much more expensive this way. > I'm surprised TSLA is in such a good shape, debt-wise. As the post also notes, "a high share price relative to your true value constitutes the ability to finance cheaply."
- renewiltord 3y ago
  A way to look at it is that "even though it has x debt, it's still worth y". For instance, imagine you have a choice between two sports players. One is currently sick and scores at one goal a game. The other is in great health and scores at one goal a game. Which player do you pick? Though of course he mentions it differently: how much would you have to pay to acquire all of the surplus from the company? You'd have to buy the company and it's debt. It's a way to look at it, of course.
- mavhc 3y ago
  Sell a lot of profitable cars, a genius business move
- franciscop 3y ago
  Exactly, I argue here (https://news.ycombinator.com/item?id=39754171 https://news.ycombinator.com/item?id=39754171) that "market cap" is probably better than this strange "enterprise value" for the stated goals of the formula, which is to compare how valuable companies are in an intuitive way for your average person. My point being that the market cap already includes (partially) the debt and cash priced in, while this whole debt is positive, cash is negative is "if you wanted to buy the company". We do not use "country debt" to measure how "valuable" a country is, we use GDP for a reason.
ArtTimeInvestor 3y ago
Only one (dismissive) side note about self-driving in the article. I have yet to hear a solid argument against Tesla achieving full self-driving within the next ten years. Self-driving will automate billions of daily man hours. Capturing even just a very small fraction of that value results in enough earnings to justify Tesla's current market cap. Even if you have to discount the earnings for another ten years, in case it takes so long to start selling FSD software. Talking rationally about FSD always results in reflexive downvoting here on HN. Which I take as a sign, that the thinking about Tesla's future is muddied by emotions among many people. Maybe because people can't imagine fundamental change and also fear change.
- canadianfella 3y ago
  [dead]
- shawabawa3 3y ago
  > I have yet to hear a solid argument against Tesla achieving full self-driving within the next ten years. You haven't heard a solid argument against me personally achieving full self-driving either, but that doesn't make it realistic You are also assuming they are able to sell their FSD for a profit, and aren't out-competed by e.g. Waymo. Maybe Tesla does make full self driving a reality, but only after Waymo has licensed a better version of self driving to Toyota who sell millions of automated cars before Tesla
  - Ekaros 3y ago
    Also, when third or fourth player enters the market. Would FSD not be commodity tech? Just buy a license and then every automaker will have it. At that point it is race to bottom, any self-driving car likely only making small margin over lifetime...
  - SideburnsOfDoom 3y ago
    Mercedes-Benz is actually in some ways the leader: "first automaker to receive government approval in the US for a Level 3 driving feature. " https://www.theverge.com/2023/1/27/23572942/mercedes-drive-pilot-level-3-approved-nevada https://www.theverge.com/2023/1/27/23572942/mercedes-drive-p... But yes _if_ it's possible and inevitable then it will also soon be a commodity.
bluescrn 3y ago
Could depend on how many planned ICE bans are postponed and by how long?
FredPret 3y ago
What a lovely blog post. It’s more about market cap and equity than forward-looking statements about hydrogen and self-driving.
makeitdouble 3y ago
If we're really digging into it, the actual value of a company should be the amount of money you need in total to buy it. Including the parts that are not for sale (so not just the public shares) That also means for instance convincing the US gov to let you have Tesla, and vice versa convincing the Japanese government and all Toyota's debt holders to not intervene in case of a Toyota buyout. And that becomes a completely different story with undefinable numbers and so much more politics.
- gruez 3y ago
  >If we're really digging into it, the actual value of a company should be the amount of money you need in total to buy it. Including the parts that are not for sale (so not just the public shares) That doesn't make any sense. The "actual value" of something must include what people are willing to pay for it, not what the existing owners are willing to sell at. If I have a trinket that I'm not willing to let go for less than $1M, the "actual value" isn't suddenly $1M.
  - edarchis 3y ago
    Agreed. Such a valuation would be different for a Japanese buyer, an American one or one that has a special project or affinity. A value should be an objective amount and the real amount paid varies depending on what you bring to the table.
  - makeitdouble 3y ago
    But then what does "actual value" means if you can never ever buy it at that price ? The same way you posit the vendor price can't be taken at face value, the buyer's price can't be the measure either (my wife's totally willing to buy my trinket for the sum of all of our possessions. That makes it quite a valuable thing right ?)
TheAlchemist 3y ago
This is a very bad term. When I think about value and price, price is what I pay, value is what I get. Enterprise value is not what you get - it's what you pay...
- epolanski 3y ago
  Yes, I was confused about the same, maybe the terminology the author uses it's correct, but it looks more like an equation of enterprise price.
- madsbuch 3y ago
  The enterprise value is the total value of the company: The value of all stocks and bonds in circulation (minus the cash, assuming you use that to pay out bonds). Why is that a bad term? I do appreciate that this does not ring will with a layman's interpretation of stocks on bonds. But think about it. If you have a house that is worth 1M and take out a loan of that house at 500k, is it now only worth 500k? No, it is still worth 1M. And prospect buyers will need to buy that bond (unless you want to keep paying it off even though you don't own the house)
  - TheAlchemist 3y ago
    You are right. It's just that in my book, value = what I get, not what I pay. Since this metric include the market cap, a Chinese OTC shell company can have an 'enterprise value' of several hundreds millions, even though everybody knows it's worth nothing. Maybe it's just me though - I like value investing.
    - madsbuch 3y ago
      Indeed, this happens often. Like buying a house under the financial crisis and taking out a loan on unreasonable valuations. This is btw. exactly what the article talks about. You should use the most favorable way to finance your company: Stocks when the market thinks you are worth more than you think and bonds when you think you are worth more than the market thinks.
madsbuch 3y ago
I see that a lot of people struggle with the term enterprise value. It might make sense to think about this in terms of housing and mortgages. You can say that the total value of a house is the mortgage + equity. When you take out a loan on a house, the value of the house does not change. Just the proportion of mortgage vs. equity.
incomingpain 3y ago
Simplistic valuation is not particularly useful. Take even just 1 more factor into account, Japan's tremendous debt and multiple lost decades and inevitable nightmare situation. Toyota basically doesnt exist until they built their bzx4 factor in the usa. https://www.bloomberg.com/news/articles/2023-03-27/fears-of-societal-collapse-prompt-new-push-for-babies-in-japan https://www.bloomberg.com/news/articles/2023-03-27/fears-of-... From the public information I know about Toyota, they are about 15 years behind Tesla. Comparatively VW is probably only about 5 years behind now. GM/Ford are about 7 years. So is tesla more valuable? It's practically infinite money more valuable. GM could spend $100 billion to try to catch up and could not. Its not about money, it's about the people who work for them.
guru4consulting 3y ago
Buying the debt is different than paying off the debt. I see so many comments here assuming that to buy the company totally (or to have total control over a company), one should pay off all debts of the company. It is simply not true. I feel this whole concept of "Enterprise Value" does not really correlate any meaningful value.

36 points by calpaterson 3y ago

This blog post is not about the "inherent value" of Tesla, but more a summary of "Enterprise Value" as defined by: "enterprise value = market cap + borrowings - cash" It's neat and not too long.

franciscop 3y ago
It's a bit hard for me to wrap my head about this "borrowings" as being part of the positive part of the equation. I understand that if you want to buy the company, then you need to pay that off, but is that really "value" in the way the article says to compare companies? - Imagine a company with 0 market cap and 0 cash, but 100M in debt. That company would be "enterprise valued" at 100M. - How can you compare that to a different company, let's say at 100M market value, with 0 debt and 0 cash and say they are the same for "enterprise value"? - Or to go even funnier, an arbitrary high market value, let's say X + 100M, with an arbitrary large amount of cash, let's say X, and say that both of those companies have the same "enterprise value" as one company that has 0 market cap and 0 cash but 100M in debt? When trying to get a "peasant estimation" of how big a company is (not in a "how much it'd cost for me to buy it" way), which is what the article is trying to argue, I'd say that it should be "market cap + cash - borrowings". Or maybe not even include the cash and borrowings, or do some more advanced calculations I don't know about, since the market probably accounts for those indirectly on the market cap!
- epolanski 3y ago
  Replace value with price and will make sense. enterprise price = market cap + borrowings - cash equivalents
- thrdbndndn 3y ago
  The equation is for more for "cost to buy". For your company A, you need to pay 0 to buy all its share, and also pay 100M to the lender to have full-control of the company. For your company B, you need to pay 100M to buy all its share, and also pay 0 for the debt. So they are both going to cost 100M for you as potential buyer. To expand a little bit, actually the "cost to buy" should exactly be how "valuable" it is. But why does it feel counterintuitive? Because when we're thinking about buying something, we usually don't really logically. Say you want to buy a car at $10000. But it also has a broken AC and you have to fix, which costs you $1000. At the end of the day, to buy a "car with a working AC" you paid $11000. That's the value of the car. But most people will think they "spent $10000 to buy car that actually only worth $9000". Is that true? For a totally fair market, you CANNOT buy the same car with working AC for $10000. It would be priced as $11000. Same goes for the company -- a company the has exactly "same" inherent value", whatever that means, but no debt, would have higher market value than the one with. So the market value, at least in theory, already reflected that difference. Hence you can add it together with the debt to get its "true value".
  - franciscop 3y ago
    I had to re-read this few times but I think it makes sense now. So what you are saying is, that if a company goes into debt, the market will also lower its valuation because it has debt, so we should not count this debt twice and that's why we need to add it up? I think we might be missing "assets" here? This is what still doesn't make sense for me: - A company just created (market cap 0) goes 100M into debt, and so has 100M cash, so it balances out to be 0. - However if that company uses those 100M cash to buy e.g. a factory, in this example what would happen? The Market Cap jumping to 100M doesn't make sense (since then the company would be "valued" at 200M), should we count the "assets" in the same way as "cash"?
    - thrdbndndn 3y ago
      > what would happen The market cap would not change. Enterprise value (which includes asset) = Market cap + debt (borrowings) - Cash. Therefore, market cap = enterprise value + cash - debt. So the company now would have EV of 100M and 0 cash and 100M debt. Its market cap stays at zero.
- gruez 3y ago
  >- Imagine a company with 0 market cap and 0 cash, but 100M in debt. That company would be "enterprise valued" at 100M. The fallacy here is assuming that market cap is an independent variable, whereas in real life it's dependent on cash/debt. This makes sense, because a company loaded with debt would be less valuable to shareholders, since the debt has to be serviced which eats into future profits. If you set all 3 values arbitrarily, of course you're going to get absurd results. It's not any different than setting the side lengths of a right angle triangle to arbitrary values, then complaining that the Pythagorean theorem is broken.
  - franciscop 3y ago
    I did touch on this: "Or maybe not even include the cash and borrowings, or do some more advanced calculations I don't know about, since the market probably accounts for those indirectly on the market cap". If they are not independent variables, then it's also not fair to plainly add variables that depend on each other, since they will give a skewed value given that simple addition would assume they are independent.
  - hnbad 3y ago
    In other words market cap is assumed to be representative of the company's "actual value" (i.e. whether it is a good investment, profitable, whatever) and the other variables are meant to correct for factors the market cap presumably does not consider. But that is still counter-intuitive if we use an intuitive understanding of "value" (i.e. worth preserving/having/acquiring). The company in this example would have no worth but EV of 100M. If you buy it, you would have gained nothing and spent 100M. Realistically with (near) zero market cap the company is likely defunct or worthless, with zero cash and massive debt it's likely bankrupt. Realistically it's just a base "buying price". To fully buy out and own a company you would need to buy all the stock (market cap) and then pay off all the debt but you could use the cash for that. That's "value" in the modern economical "market price" sense, not in any intuitive sense. And it doesn't even mean paying that price would be a good investment because two different companies may have the same price but be hugely different in terms of potential ROI. Notably it only accounts for assets in the sense that the market cap might consider them - but we all know (do we?) that the stock market is not rational even when it can be rationalized otherwise we would be better at predicting it (notably a lot of "experts" perform worse than chance when trying to predict it). I guess if you wanted to account for value in the sense of "worth" the formula would have to be a multiplier of the share price as a share price of zero would presumably mean the market sees no use in it and the other factors don't matter (but then again there's no good reason why debt would factor into it positively because it's merely a proxy for capital based on the assumption that it's used for investments rather than cashflow).
- madsbuch 3y ago
  The article touches fundamentals in capital markets: Stocks and bonds are essentially the same thing. The way to think about the enterprise value is: How much should I pay in order to gain exclusive control over the company and all its assets. > Imagine a company with 0 market cap and 0 cash, but 100M in debt. That company would be "enterprise valued" at 100M. In this case you would pay 100M to not have any liability to bond holders.
- devoutsalsa 3y ago
  If you acquire the company, you assume it's debt, too. So that's a liability you assume, meaning you have to pay that on top of paying for the market cap of the company. You also get the cash, which is a reward for buying the company. So to buy the company and pay off all the debts. Example: - Company Stock is worth market cap of 2 billion. - Company has 2 billion in debt. - Company has 1 billion in cash. 2B (acquiring all the stock) + 2B (paying off all the debt) - 1B (cash in the bank) = 3B (enterprise value, aka the effective price to buy the company w/ no debt). Some people call the enterprise value the true price of the company.
  - nirvael 3y ago
    I think the confusion lies in the word "value". To use your example of Company, imagine another company (Company2) exactly the same as Company but without the debt. Enterprise value of Company is 3B, enterprise value of Company2 is 1B. But Company2 would clearly be preferential to acquire, because it has no debt, despite the much lower enterprise value. So enterprise "value" is not a useful measure of "value". Am I misunderstanding something here?
    - dagw 3y ago
      The part you're missing is that the 3 variables aren't independent of each other or of the underlying company. You'll never have two 'identical' companies that only differ in one of those variables. If company 2 has the same market cap with zero debt as company 1 has with huge amount of debt, then that implicitly means that the market values what company 2 does less. Perhaps they're in a market with lower growth or have a smaller market share or have a product with less upside potential or have huge lawsuit hanging over them. If company 1 and company 2 did the same thing and had the same profits and sales, but the only difference is that company 1 had a lot more debt, then the market cap of company 2 would almost certainly be higher than the market cap of company 1. In fact you could then use the Enterprise Value formula to work out what the market cap of company 2 'should' be.
      - nirvael 3y ago
- kjksf 3y ago
  Debt can be good when used as leverage. As I understand it, the majority of debt of car companies is used to provide leases. So e.g. GM borrows money at X% interest rate and gives credit to customers at X+Y%. Y% is their profit. So the bigger the debt, the more additional profit they make. This is also a ticking bomb because leverage generates more profit when times are good but increase losses when times are bad. That Y% finances the risk that a customer will stop paying. It also comes from GM being able to re-sell the car after the lease for more that it's worth ($PriceOfCar - $TotalLeasePayments). When bad times come, like in 2008, those companies are hit with double whammy: people have less money, so more people abandon the lease. And also buy less cars so car prices drop so re-sell value drops. So suddenly GM has losses and cannot afford the debt payments and that's how they go bankrupt.
- deleted 3y ago
  [deleted]
- rich_sasha 3y ago
  Consider the opposite. The company has a market cap of $100bn and $10bn in cash. If you buy the company out for $100bn, you automatically also get $10bn cashback. So it's more like it is worth 90bn, plus has some cash attached - but that bit is a wash. Debt is negative cash, so instead of subtracting it from market cap, you add it in.
- throwaway190324 3y ago
  The submission doesn't state it explicitly, but a firm's debt enters its Enterprise Value at its market value, not its nominal value [0]. If an openly traded company (a company that has non-zero shares) had a market capitalization of zero dollars, the market value of a bond issued by it would be, most likely, also zero, or very close to zero, even if its face value were non-zero. If the market values a firm's stock at zero dollars because it isn't expected to increase in value nor to pay any dividends at any time in the future, then it wouldn't be expected to pay back any of its debt either, and so the market value of its debt would also be zero. Hope this makes things clearer. [0]: https://en.wikipedia.org/wiki/Enterprise_value#EV_equation https://en.wikipedia.org/wiki/Enterprise_value#EV_equation

Rygian 3y ago

One of those companies has been sinking money into the "Uncompetitive" section of the hydrogen ladder. The other hasn't. https://www.linkedin.com/pulse/hydrogen-ladder-version-50-michael-liebreich https://www.linkedin.com/pulse/hydrogen-ladder-version-50-mi...

laydn 3y ago

Isn't this a strange way to put Toyota to be "closer" to Tesla by "enterprise value"? I mean, if toyota had 1T USD debt, it's enterprise value would have been 1.25T, and it would have been more "valuable" than Tesla. But, how is that "better", if you want to invest in a company? I'm surprised TSLA is in such a good shape, debt-wise.

ZiiS 3y ago
If Toyota had 1T debt and kept its its current market value then it would have to be doing much better then it is. If it could not afford the debt it would be priced in. Companies with enterprise values higher then thier market values are not better investments.
A_D_E_P_T 3y ago
Somewhere towards the bottom, the post explains that "the price to buy the business and gain all its economic value is the enterprise value." So if you want to buy Toyota, and reap all of the profits, you buy all of the stock and all of its debt. Toyota and GM become much more expensive this way. > I'm surprised TSLA is in such a good shape, debt-wise. As the post also notes, "a high share price relative to your true value constitutes the ability to finance cheaply."
renewiltord 3y ago
A way to look at it is that "even though it has x debt, it's still worth y". For instance, imagine you have a choice between two sports players. One is currently sick and scores at one goal a game. The other is in great health and scores at one goal a game. Which player do you pick? Though of course he mentions it differently: how much would you have to pay to acquire all of the surplus from the company? You'd have to buy the company and it's debt. It's a way to look at it, of course.
mavhc 3y ago
Sell a lot of profitable cars, a genius business move
franciscop 3y ago
Exactly, I argue here (https://news.ycombinator.com/item?id=39754171 https://news.ycombinator.com/item?id=39754171) that "market cap" is probably better than this strange "enterprise value" for the stated goals of the formula, which is to compare how valuable companies are in an intuitive way for your average person. My point being that the market cap already includes (partially) the debt and cash priced in, while this whole debt is positive, cash is negative is "if you wanted to buy the company". We do not use "country debt" to measure how "valuable" a country is, we use GDP for a reason.

ArtTimeInvestor 3y ago

Only one (dismissive) side note about self-driving in the article. I have yet to hear a solid argument against Tesla achieving full self-driving within the next ten years. Self-driving will automate billions of daily man hours. Capturing even just a very small fraction of that value results in enough earnings to justify Tesla's current market cap. Even if you have to discount the earnings for another ten years, in case it takes so long to start selling FSD software. Talking rationally about FSD always results in reflexive downvoting here on HN. Which I take as a sign, that the thinking about Tesla's future is muddied by emotions among many people. Maybe because people can't imagine fundamental change and also fear change.

canadianfella 3y ago
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shawabawa3 3y ago
> I have yet to hear a solid argument against Tesla achieving full self-driving within the next ten years. You haven't heard a solid argument against me personally achieving full self-driving either, but that doesn't make it realistic You are also assuming they are able to sell their FSD for a profit, and aren't out-competed by e.g. Waymo. Maybe Tesla does make full self driving a reality, but only after Waymo has licensed a better version of self driving to Toyota who sell millions of automated cars before Tesla
- Ekaros 3y ago
  Also, when third or fourth player enters the market. Would FSD not be commodity tech? Just buy a license and then every automaker will have it. At that point it is race to bottom, any self-driving car likely only making small margin over lifetime...
- SideburnsOfDoom 3y ago
  Mercedes-Benz is actually in some ways the leader: "first automaker to receive government approval in the US for a Level 3 driving feature. " https://www.theverge.com/2023/1/27/23572942/mercedes-drive-pilot-level-3-approved-nevada https://www.theverge.com/2023/1/27/23572942/mercedes-drive-p... But yes _if_ it's possible and inevitable then it will also soon be a commodity.

bluescrn 3y ago

Could depend on how many planned ICE bans are postponed and by how long?

FredPret 3y ago

What a lovely blog post. It’s more about market cap and equity than forward-looking statements about hydrogen and self-driving.

makeitdouble 3y ago

If we're really digging into it, the actual value of a company should be the amount of money you need in total to buy it. Including the parts that are not for sale (so not just the public shares) That also means for instance convincing the US gov to let you have Tesla, and vice versa convincing the Japanese government and all Toyota's debt holders to not intervene in case of a Toyota buyout. And that becomes a completely different story with undefinable numbers and so much more politics.

gruez 3y ago
>If we're really digging into it, the actual value of a company should be the amount of money you need in total to buy it. Including the parts that are not for sale (so not just the public shares) That doesn't make any sense. The "actual value" of something must include what people are willing to pay for it, not what the existing owners are willing to sell at. If I have a trinket that I'm not willing to let go for less than $1M, the "actual value" isn't suddenly $1M.
- edarchis 3y ago
  Agreed. Such a valuation would be different for a Japanese buyer, an American one or one that has a special project or affinity. A value should be an objective amount and the real amount paid varies depending on what you bring to the table.
- makeitdouble 3y ago
  But then what does "actual value" means if you can never ever buy it at that price ? The same way you posit the vendor price can't be taken at face value, the buyer's price can't be the measure either (my wife's totally willing to buy my trinket for the sum of all of our possessions. That makes it quite a valuable thing right ?)

TheAlchemist 3y ago

This is a very bad term. When I think about value and price, price is what I pay, value is what I get. Enterprise value is not what you get - it's what you pay...

epolanski 3y ago
Yes, I was confused about the same, maybe the terminology the author uses it's correct, but it looks more like an equation of enterprise price.
madsbuch 3y ago
The enterprise value is the total value of the company: The value of all stocks and bonds in circulation (minus the cash, assuming you use that to pay out bonds). Why is that a bad term? I do appreciate that this does not ring will with a layman's interpretation of stocks on bonds. But think about it. If you have a house that is worth 1M and take out a loan of that house at 500k, is it now only worth 500k? No, it is still worth 1M. And prospect buyers will need to buy that bond (unless you want to keep paying it off even though you don't own the house)
- TheAlchemist 3y ago
  You are right. It's just that in my book, value = what I get, not what I pay. Since this metric include the market cap, a Chinese OTC shell company can have an 'enterprise value' of several hundreds millions, even though everybody knows it's worth nothing. Maybe it's just me though - I like value investing.
  - madsbuch 3y ago
    Indeed, this happens often. Like buying a house under the financial crisis and taking out a loan on unreasonable valuations. This is btw. exactly what the article talks about. You should use the most favorable way to finance your company: Stocks when the market thinks you are worth more than you think and bonds when you think you are worth more than the market thinks.

madsbuch 3y ago

I see that a lot of people struggle with the term enterprise value. It might make sense to think about this in terms of housing and mortgages. You can say that the total value of a house is the mortgage + equity. When you take out a loan on a house, the value of the house does not change. Just the proportion of mortgage vs. equity.

incomingpain 3y ago

Simplistic valuation is not particularly useful. Take even just 1 more factor into account, Japan's tremendous debt and multiple lost decades and inevitable nightmare situation. Toyota basically doesnt exist until they built their bzx4 factor in the usa. https://www.bloomberg.com/news/articles/2023-03-27/fears-of-societal-collapse-prompt-new-push-for-babies-in-japan https://www.bloomberg.com/news/articles/2023-03-27/fears-of-... From the public information I know about Toyota, they are about 15 years behind Tesla. Comparatively VW is probably only about 5 years behind now. GM/Ford are about 7 years. So is tesla more valuable? It's practically infinite money more valuable. GM could spend $100 billion to try to catch up and could not. Its not about money, it's about the people who work for them.

guru4consulting 3y ago

Buying the debt is different than paying off the debt. I see so many comments here assuming that to buy the company totally (or to have total control over a company), one should pay off all debts of the company. It is simply not true. I feel this whole concept of "Enterprise Value" does not really correlate any meaningful value.