Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

What Market Cap Really Means for GM


Enterprise value can add perspective not offered by market capitalization alone.


Why can't they just say, 'Go to this place and here is the treasure; spend it wisely?'
--Riley Poole (National Treasure)

Recently some have opined that General Motors (GM) is a buy here because of its low market capitalization. Market capitalization, or 'market cap', is found by multiplying the number of shares outstanding in a stock (a.k.a. 'the float') by the share price.

market capitalization = number of shares outstanding x stock price

With a float of about 556 million shares and a share price of $10.17 (July 3rd close), GM's market cap is approximately $5.8 billion. As a component of the Dow Jones Industrial Average, GM's market cap is significantly lower than the other 29 stocks that comprise index. Next up are Alcoa (AA) at about $27 billion, and DuPont (DD) and Home Depot (HD) at about $38 billion.

Market cap is often viewed as a measure of overall company value. And, in the eyes of some, GM's low market cap reflects a company that is inexpensive and worthy of investment (or at least a trade).

As a measure of overall corporation value, however, market capitalization is incomplete since it does not directly account for a company's debt and cash positions. In the event of a buyout, the buyer would have to assume the target's debt while pocketing its cash.

A better reflection of takeover value is enterprise value. Enterprise value equals the company's market cap plus its debt (which could include minority positions and preferred stock) minus its cash.

enterprise value = market capitalization + debt - cash

GM's March 2008 balance sheet indicates total debt of about $44 billion and cash of about $22 billion which implies an enterprise value of about $28 billion. As such, GM's enterprise value is more than 4 times its market capitalization--due to the large amount of debt to be assumed by any would-be acquirer.

Big discrepancies between market cap and enterprise value are common, which shouldn't be too surprising given the degree of corporate leverage these days. As another example, consider the other 'General' in the Dow 30, General Electric (GE). GE's market cap currently stands at nearly $270 billion. However, due to the company's half a trillion dollar debt load, GE's enterprise value balloons to about $800 billion, and vaults the firm to perhaps the most valuable (or expensive) enterprise on the planet.

When trying to get a picture of the overall value that the market is assigning to a company, enterprise value often adds perspective not offered by market capitalization alone.

< Previous
  • 1
Next >
Position in GE

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos