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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
by 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 agoYou 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 agoIndeed, 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.