It’s nearly impossible for a person, company or country to go belly up when they’ve got more cash than debt, but what do they mean?
As a smart investor, keeping personal debt under control is crucial for your financial well-being. Same goes for the companies you invest in.
Sure, it’s completely normal for companies to borrow money to fund their rise to greatness. But, at MyWallSt, we look for companies that are able to pay off all of their obligations. It’s a very important indicator of a business’ health.
Enterprise Value vs. Market Cap
An easy way to figure out if a company is cash-positive is by calculating a company’s enterprise value.
Basically, if enterprise value is less than market cap, then the business has more cash than debt.
Enterprise Value = Market Cap – Cash + Debt.
Here’s what that formula means:
Market capitalization (total number of shares in existence multiplied by the current share price) is roughly how much money you’d need to buy the entire business.
But when you buy a business you’re also getting its cash and its debt. Enterprise value takes this into account by using the formula above. It offers a clearer picture of a company’s financial well-being.
You don’t need to calculate enterprise value yourself. It will usually be listed in the “Key Statistics” section on financial websites. Alternatively, you can simply look at a company’s balance sheet and see if they have more cash than long-term debt.
Cash and debt is:
- Look for companies with more cash than debt.
- Market Cap – Cash + Debt = Enterprise value
- Enterprise value is more accurate than market cap when determining a company’s value.
MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.