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I guess I don't worry about day to day fluctuations in these matters.  There is very seldom that much difference in the outcome  to matter.  That's cutting the margin of safety much too close for my serenity.  I remember WB saying that he would rather be vaguely right than precisely wrong.

Coming from a background dealing with real estate appraisals a lot, I try to look at several valuation angles, based on assets, based on earning power, based on comparables (if there ever truly any!) and past history. 

It's just another tool in the toolbox to use as one needs it.

The only data I see that you are missing is 'minority interest' & 'preferred stock'. You would add those two items in the same way as total liabilities because they are debts, not often included in Total Liabilities but sometimes are, that a business would need to pay just like a debt if they purchased the entire business. Therefore:

EV = Market Capitalization + Total Liabilities + Minority Interest + Preferred stock – Excess Cash & Equivalents.

Your Excess Cash & Equiv. is correct.

So now we come to an important question; that of Market Capitalization. If the Market Cap. of a company is currently 'X', how do we know if that is in rational judgment? The biggest problem I have with EV is its use of Market Capitalization as the starting point to finding its value. If we declare Market Cap as a rational expression of the true asset value of a business then we also affirm that the business is being priced efficiently. Since the main job of the value investor is to find price inefficiencies, I suggest, rather than using Market Cap as your starting point, you should use either Book Value or Tangible Book Value (preferably) as your starting point.

Let's look at an example:

Gannett (NYSE: GCI)

Market Capitalization: $3.56B

Book Value Equity: $1.38B

Cash & Equivalents: 123.77M

Goodwill: $2.87B

Total Liabilities: $5.73B

Minority Interest: $214M

Preferred Stock: $0

Total Shares Out: 236.24M

TCL is smaller than TCA so 0 is greater.

Current Share Price: $15.08 p/s

If we beleived that the investing world for the most part was of a rational mind then we'd use Market Cap as our starting point.

$3.56B + $5.73B + $214M – $123.77M = $9.38B / 236.24M = $39.71 Per Share

Now, a more rational expectation in my opinion is to start with the Book Value of Equity and deduct goodwill:

$1.38B + $5.73 + $214M – $2.87B – 123.77M = $4.33B / 236.24 = $18.33 Per Share

Note: I would also deduct items that carry no value that are often found on the balance sheet; but you need to read the SEC filings with a fine toothed comb to find out what these items are. For example: 'other assets' could consists of $10 Million worth of toothpicks in which case their value would most likely be useless unless the purchasing business operates in the toothpick business.

In any event, this is the way I use Enterprise Value and it makes the most sense to me.

Jim

Hello All,

I have been testing Enterprise Value equation: Market Caps + Total Debt – Excess Cash

Excess Cash = Total Cash – Max(0, Current Liabilities – Current Assets)

Here are my questions:

1. I am assuming Total debt being just Total Liabilities. Is this correct?

2. For Excess cash, I am confused what to use. I been using Cash and Cash equivalent as the excess cash. Is this correct?

3. I understand that EV is a much more accurate take over price of a company.

    – If the EV is negative, then how do we use this in our evaluation? Since EV to Earning and EV to FCF would be negative. Should we just say that is the cash in excess that would be given back to the investor if and when the company fails?

As an example, I have used MYRX and their current 09/2009 10-Q filing.

Market Caps:123.3m

Cash and Equiv: 69.4m

Current Assets: 160.1m

Current Liabilities: 7.1m

Total Liabilities: 7.1m

Excess Cash = 69.4m – max(0, 7.1m – 160.1m) = $69.4m since the max of (0, -153) is 0.

EV = 123.3m + 7.1m – 69.4m =  61m

Now this does not match JJ's calcuation. What am I doing wrong?

Thanks.

-SHM