One valuable lesson I learned from The Little Book that Beats the Market is that market capitalization (of a stock) is only useful as a component in calculating enterprise value. Two companies with identical market capitalizations can have drastically different "values". Market capitalization just tells you (# of shares) x (current share price)
. Enterprise value tells you the (net) cost of buying the entire company at the current share price---when you buy, debt needs to be paid off and cash goes into your pocket. So, valuation metrics based on market capitalization miss an important aspect of valuation.
Monday, February 21, 2011
Enterprise Value
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