Question on Retained Earnings and Enterprise Value?
Hi! I hope this is the right forum for my question, Im new to WSO :)
In short, I struggle with two things:
-
Retained Earnings
To my understanding represents the total sum of all [Net Income - Dividends] paid over all FYs of a companys lifetime. Now, when I consider huge, profitable companies that are around for decades, this should result in massive values for retained earnings?! Why is this not the case? -
Enterprise Value
Ok, [EV = MCap + All Debt - Cash & Equivalents]. Makes sense. But does the capital market not account for the Debt and Cash balance of a company and adjust the trading price of a stock, hence already taking this into account for MCap? This would make the EV calculation redundant...
Thanks in advance!
Enterprise value is only the value of core business assets to ALL investors. So you subtract cash because it is not core and it is also implicity accounted for in equity value. Debt is NOT accounted for in the equity value because equity value is all assets (non core + core), but only to equity investors, and debt has no value to equity investors.
Actually debt is accounted in the equity value but not explicitly. For EV, we explicitly calculate the value of the business attributable to all providers of capital
Because they dividend out a shitload of money, often borrowing money to do so. In addition they have huge hidden reserves (brand names, depreciated real estated, etc) that has a market value well above book value, so actual equity value is higher.
If you borrow 100 from a bank and leave it on the BS as cash, there is no change in EV. Now you decide to pay a dividend of 100 --> EV remains the same, but MCap goes down by 100. I prefer to look from EV (as that's the result from EV/EBIT(DA) multiples and DCF).
EV: 1000 Debt: (500) Cash +100 EqV: 600
pay out dividend: EV: 1000 Debt (500) Cash 0 EqV: 500
So companies in general pay so much dividends that those payments more or less cancel out net income over the years?
Well explained with perfect example, thank you very much!
I thought Equity Value is Share Price x Fully Diluted Shares Outstanding. Enterprise Value is Equity Value + Debt + Preferred Shares + Minority Interest - Cash.
If you borrow money, there would be no change in enterprise value as cash would increase and debt would decrease. But if you pay out a dividend from cash, cash would decrease and that would effectively raise your enterprise value. The change in cash wouldn’t affect share price or diluted shares outstanding and thus the equity value wouldn’t change. I’m not sure how your math checks out.
I believe it is realted to ex-dividend date. On the ex-dividend date, the stock price is adjusted downward by the amount of the dividend by the exchange and so market cap will decrease by the same amount
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