Valuation ways to make small money a conceptual overview street of walls

This equation is simple enough. Assuming that the company is profitable, and that it’s more valuable in operation than in liquidation (in other words, the company is worth more money if it continues in ways to make small money business rather than stopping business and selling off the assets ways to make small money to the highest bidders), the value of the company is equal to the value ways to make small money of its productive operations. This value must also equal the value of all of ways to make small money the net claims against the company’s assets, because these assets are being used to produce money for ways to make small money these claimants, or stakeholders (assuming, of course, that these claims have been valued correctly). The “excluding excess cash” piece will be explained in a moment.

• cash: money that is owned by the company—in other words, it’s sitting on the company’s balance sheet. This money, assuming it is not required by the operations of the ways to make small money business, could be used to pay off existing claimants, or stakeholders. (for example, the cash could be used to pay off debt; it could also be used to repurchase outstanding shares in ways to make small money the company’s equity.) thus the higher the cash balance a company has, the less its operations must be worth. This concept is counterintuitive: shouldn’t owning more cash be a good thing? Yes, in a sense it is—but assume for a moment that a company’s market value (of equity) is fixed at a certain dollar amount. That value can be ascribed to only two sources: (1) the residual claim value on a company’s operations after all other stakeholders have been paid off, and (2) the value of the money on the company’s balance sheet. The higher (2) is, the lower (1) is, and vice versa. Therefore, to get to EV, we must subtract cash from the market value of the ways to make small money company’s equity. (this is one way of looking at it. In practice, cash is often subtracted from debt to get an important ways to make small money statistic called net debt. Net debt is the value of the debt once balance ways to make small money sheet cash has, hypothetically, been used to pay some of it off. Diagrams below will explain the different ways of conceptualizing this.)

• minority interest: this is a tricky one. Corporations often have a liability account called minority interest (MI). This is a special accounting designation for a specific scenario: when a corporation owns most, but not all, of a subsidiary company. If that is the case, the subsidiary company is consolidated entirely into the corporation’s financial statements, so that it would appear, at first glance, that the corporation does indeed own 100% of that subsidiary. In fact it does not, so this liability account is created to represent the value ways to make small money of the shares owned in the subsidiary by other individuals ways to make small money or companies. (similarly, there will be a corresponding minority interest expense on the ways to make small money income statement for the corporation, representing the portion of value from the subsidiary’s operating results that actually belongs to the other shareholders ways to make small money in the subsidiary.) since this MI represents the value of the partial ownership ways to make small money (by others) in this subsidiary, it should be treated like debt – that is, in order to get to EV, we must add minority interest to the market value of ways to make small money the company’s equity. (we should keep in mind, then, that this EV statistic will include the entire value of ways to make small money the company’s subsidiary, even though the corporation itself does not own 100% of it.)

• preferred equity: despite the name, preferred equity primarily operates as debt, not equity. It is junior to all other forms of debt, but it is also senior to the equity (often called common equity or just “common.”) often, preferred equity can be converted to shares of common equity, hence the name. It may be convertible to common equity but, until that time, it receives interest and is in line ahead of the ways to make small money common equity in the capital structure, so it is “preferred” to the common shares. It receives preferential treatment. Because preferred equity is actually primarily debt unless and until ways to make small money it is converted to equity, we must add preferred equity to the market value of ways to make small money the company’s (common) equity.

In this sense, cash on the balance sheet usually (at least for the most part) is non-core. Unless it’s cash that the business needs to operate (such as dollar bills in the registers at a retail ways to make small money operations), it is not being used to generate profit in the ways to make small money business operations. That’s why it is stripped out in EV calculations. (other non-core assets may be as well, especially if they can be sold off for cash without ways to make small money harming the operations of the business. For example, real estate and commodities can often be sold without impacting ways to make small money the company’s cash-generating operations.)

Notice in this list that “cash and cash equivalents” is a subtraction from the calculation—cash and cash-like assets are thus a sort of “anti-debt.” debt can also come in several different flavors, but on the balance sheet it’s almost always broken down into short-term debt and long-term debt. This is because short-term debt is coming due soon (within less than a year), and thus must be paid off or refinanced in the ways to make small money near future. This may be of interest if the company is having ways to make small money financial trouble—the due date on the near-term debt may trigger difficulties for the company in terms ways to make small money of repayment. This type of difficulty, which can end up being a crisis under the right ways to make small money circumstances, is called a liquidity problem (or crisis). Understanding enterprise value vs. Market value

Notice that in the first two examples, enterprise value is used. This is because sales and EBITDA generate profit/value that is available to all stakeholders. No compensation has yet been taken out for non-equity stakeholders. By contrast, price/earnings reflects the net income for a company, which is computed after compensation for other stakeholders has been ways to make small money removed (interest expense and minority interest). Therefore, this profit/value is only available to equity stakeholders.

People new to valuation may ask, “why is it incorrect to use market value/EBITDA or enterprise value/net income?” the answer lies in the fact that for any multiple, the denominator and numerator within that multiple must either include ways to make small money or exclude leverage. In other words, both the numerator and denominator must both relate to either ways to make small money all stakeholders or only shareholders. Otherwise, comparisons across companies will not be “apples-to-apples”—they will be difficult to compare because different companies utilize ways to make small money different amounts of leverage.

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