Re:Why Apple shares are dirt cheap
by tomkarlo on Tuesday April 19, 2011 @03:59PM
(#2463974)
"...that Apple's cash increases the stock's value even if you ignore its cash."
For companies with large pools of cash, it's sometimes useful to remove that from the market cap when looking at how they're valued by the market (similarly, you'd add in debt to get the enterprise value.) Ostensibly the market values a dollar in the bank as a dollar of market cap (although one can argue that.) So if you're trying to see if the market is undervaluing the actual enterprise as a whole relative to its earnings flow, you want to subtract the cash holdings from the market cap.
Maybe easier as an example: If you have a company with $1 earnings, $100 market cap and $99 in the bank, it might look like the market is valuing it at 100x earnings unless you subtract that $99 and see that the market is valuing the enterprise at 1x earnings.
For companies with large pools of cash, it's sometimes useful to remove that from the market cap when looking at how they're valued by the market (similarly, you'd add in debt to get the enterprise value.) Ostensibly the market values a dollar in the bank as a dollar of market cap (although one can argue that.) So if you're trying to see if the market is undervaluing the actual enterprise as a whole relative to its earnings flow, you want to subtract the cash holdings from the market cap.
Maybe easier as an example: If you have a company with $1 earnings, $100 market cap and $99 in the bank, it might look like the market is valuing it at 100x earnings unless you subtract that $99 and see that the market is valuing the enterprise at 1x earnings.