Course 307: Cash Return
Enterprise Value
In this course
1 Introduction
2 Watch the Cash Flow
3 Enterprise Value

The second part of the equation--market cap plus liabilities--is the company's "enterprise value." It is the amount it would cost an investor to buy the whole company, lock, stock and barrel. The idea is that such a hypothetical investor would have to pay for all the company's stock and pay off any debt left over after the cash is depleted. As an example of how enterprise value works, consider Philip Morris MO and Intel INTC. Both of these companies generated more than $6 billion in free cash flows in 1998--quite an impressive feat. But Philip Morris has a market cap of about $55 billion and an enterprise value of about $101 billion, as opposed to a market cap in the neighborhood of $268 billion for Intel and an enterprise value of about $278 billion. Thus, Philip Morris' cash-on-cash return of 5.9% ($6 billion/$101 billion) is significantly higher than Intel's 2.2% ($6 billion/$278 billion). A list of companies with high cash-on-cash returns can be a good starting place for someone seeking reasonably priced but profitable stocks. Beware, though: Sometimes a company will have a temporarily high cash-on-cash return because its share price has plummeted, thus reducing its market capitalization. And tiny companies usually have much more volatile cash flows than bigger, more stable firms do. That's why it's usually a good idea to screen out very small companies and those with erratic earnings when looking for potential cash cows. If used prudently, though, cash-on-cash return is an excellent way to measure how well a company is generating cash for its owners.

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