Forum Archive Index - February 2001

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

> 
> I was reading Ben Dutton's reference to " One sure way to avoid
> value traps ".( Thank you Ben! ).
> 
> As you know, it referred to "equity plus debt" 
>
That is the short version.   The actual quote is below.

"Computing a company's enterprise value is easy. 

Take the stock's market capitalization (which is the stock price
multiplied by the number of shares outstanding), add long-term debt, 
and then subtract the value of assets peripheral to the core 
businesses (that is, cash). To compute a per-share number, divide 
the enterprise value by the number of outstanding common shares"
>
> and I took it to mean:" Net equity + debt ".
>  And that in turn convinced me to deduct
> intang. from the market cap.!
> 
I think you were tripped up by the loose use of the word 'equity' 
which seems to abound in financial circles.  

There is the money that a company calls its own which was originally 
put up by the shareholders plus any retained earnings that the 
company has accumulated over time.   This is the "shareholder's 
equity" in the company.

There is also the 'equity markets' within which a company's share 
price can be regarded as a measure of its equity.  But this is quite 
different to 'shareholders equity'.   

Intangibles is a different issue again as intangible assets are very 
real in the sense that they can be borrowed against.  In fact, Lion 
Nathan would be bankrupt if they didn't use their intangible assets 
as real assets.  And since all the bankers who have lent Lion Nathan 
their borrowings seem to be sleeping soundly in their beds, I see no 
reason for those shareholders who hold shares in a company stacked 
with intangible assets to sleep any less soundly. SNOOPY


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