Stuck on how to calculate equity value from EV for this particular company.
This is a payments company that generates profits from the fees charged to passing through money from card issuers to merchants. Company receives transaction value excl. fees from card issuer on Day 1, and pays to merchants excl. own fees on Day 2. So there would be a significant amount of cash sitting on their balance sheet. But besides the operational process above, there is no explicit mention anywhere in the filings on minimum cash requirement / trapped cash. The company also has virtually no debt at all.
Research analysts seem to deduct the entire cash from market cap to get EV, but it's a small cap company and sparsely covered so likely done without too much thought.
Thinking the other way, if this is say, a company of $1bn EV with $500m net cash, it's hard to digest to add this entirely to define Equity Value as $1.5bn and present it to a potential acquiror, when it's clear most of the cash will presumably be paid out to the merchants as part of its daily operations.
It seems I should go the extra mile and try to determine operational and excess cash, but is there a rationally sound way of deriving it without being too cheeky?
It seems like they should break this out on their balance sheet into AR and AP, right? Because that money really isn't cash and cash equivalents in terms of calculating EV, it's more like a customer deposit and payout, or revenue and revenue adjustment?
Are there any interviews out there with Stripe finance guys that could lend some insight?
Yep its like a customer deposit - not an AP or revenue related item, as revenue is the gross fees (company's+card issuer's) with COGS being what I pass back to the card issuers. But even thinking it in an AP perspective, for any other company it's not like we adjust cash if there's significant AP and enough cash to cover it after debt...
As for industry insight, I do know already about that cash processing cycle above. As for any research or news reference on how to treat the cash I haven't come across yet... came here as last resort
Gotcha. I'm with you on not presenting the cash on deposit to a potential acquirer - as for a potential way to derive it, do you have access to more detailed financials or are you working from public filings?
You could look at monthly/quarterly cash flows and break out the difference, e.g. total collection volume stacked against total vendor payments...how are you currently thinking about getting to operational cash?
I was thinking to net out that advances item, but then couldn't come up with an argument on why it can't be applied to A/P.... Am I missing something?
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