Is it a good or bad thing if a small cap’s enterprise value exceeds its market cap?
At Stockhead, we tend to judge a company’s size by its market capitalisation.
But a company’s enterprise value may be substantially greater – is this good or bad?
In short, it depends. Using a base of $500 million, Stockhead has recapped stocks with a market cap below this with the largest enterprise values.
Market cap is simply the share price multiplied by the number of shares. The $6.5 million market cap of Imagion Biosystems (ASX: IBX) derives from multiplying its share price (0.054) with shares on issue (323,710,000).
But this simply looks at the share price. There is nothing on a company’s financial statements that go into such a valuation.
Hence, it would be accurate if shares were all that made a company – but it may have assets and debt which an acquirer would take on.
(Market Capitalisation + Total Debt + Minority Shares + Preferred Equity) – Cash and Cash equivalents = Enterprise Value
If you do not have debt, minority shares and preferred equity you exclude them, as is the case with the small caps with the highest EVs.
Preferred Equity alludes to redeemable preferred shares. These are a claim against in the business although not all small caps will have them. Minority shares is the proportion of subsidiaries owned by minority shareholders but again it is not always included, let alone significant.
Debt refers to total debt, not net debt, although this excludes accounts receivable. You can find cash and cash equivalents in any company’s financial statements.
While we rarely cover large caps, we’ll start with Qantas (ASX: QAN) as an easy example to relate to. Its market cap is $8.84 billion but its EV is $12.34 billion.
To reach this:
($8.84 billion + 0 + $3 million + $5 billion) – $1.49 billion = $12.34 billion.
Now of course, debt in and of itself is not a bad thing – as long as you can repay it. It is common for capital intensive companies (such as airlines) to borrow to pay for aircraft. It may not have money upfront but be able to make it up over the life of the assets (aircraft).
This measure shows you two things. First, how appealing your stock would be to an acquirer.
This is particularly relevant for companies that explicitly state this as a goal such as 4DS Memory (ASX: 4DS).
Second, how reliant on debt your stock is. While indeed some industries may be capital intensive, all debt has to be repaid and the less of your own value you have, the less confidence one can have of its servicability.
Stockhead found 13 companies with market caps below $500 million but enterprise values above $500 million, and five above $1 billion.
The largest is mortgage broker Resimac (ASX: RMC).
To lend you the money it has to borrow the money from elsewhere and according to Bloomberg, it has $9.7 billion. If it was to be snapped up, a buyer would acquire the debt, not just its $259.7 million in shares.
Two other finance companies made the list, Australian Finance Group (ASX: AFG) and Auswide Bank (ASX: ABA).
But physical capital makes you debt-intensive too.
Stockhead also noticed satellite play Speedcast (ASX: SDA) with an enterprise value nearly three times its market cap.
Another was Huon Aquaculture (ASX: HUO), have been investing in its fishing nurseries in Tasmania. Its debt pushes its enterprise value over $130 million more than its market cap.
So what for stockholders? This measure shows you two things. First, how appealing your stock would be to an acquirer. This is particularly relevant for companies that explicitly state this as a goal such as 4DS Memory (ASX: 4DS).
Second, how reliant on debt your stock is. While indeed some industries may be capital intensive, all debt has to be repaid and the less of your own value you have, the less confidence one can have of its serviceability.