Difference between market cap, equity and net worth of a company?

Leroy42 · 17 June 2011

Being a late in life stock investor I am still trying to gain a better understanding of some basic terminology to assist in my Fundamental Analysis.

This is my first post to the ASF site and I am sure the Buffett advocates out there will be able to clarify the difference between Market Cap-Equity and Net Worth of a company?

danbradster · 17 June 2011

Market cap is the shares on issue multiplied by the share price, ie the perceived value of the company.

Net Worth may refer to Net Assets...Assets minus Liabilities. The is a measured value rather than a perceived value.

Leroy42 · 20 June 2011

danbradster said:
Market cap is the shares on issue multiplied by the share price, ie the perceived value of the company.

Net Worth may refer to Net Assets...Assets minus Liabilities. The is a measured value rather than a perceived value.

Appreciate your advise and guidance.. Regards

danbradster · 21 June 2011

Leroy42 said:
Appreciate your advise and guidance.. Regards

NTA is more applicable to companies like property trusts that utilize hard assets. The SP will reflect both NTA, profit and future potential. A company such as a franchise making money from franchise fees however will will trade quite separately from NTA, it will trade based only on profit and future potential, not NTA.

daunus · 25 June 2011

danbradster said:
Market cap is the shares on issue multiplied by the share price, ie the perceived value of the company.

Net Worth may refer to Net Assets...Assets minus Liabilities. The is a measured value rather than a perceived value.

But I thought not always all of a company is available as shares. I.e. part of it is privetly held and part publicly available on the market.

Also on a related issue, when a company does a share buy back, where do those bought back shares go? Do they cease to exist and everybodys slice of the pie simply get bigger?

Why not simply just give out a bigger dividend then instead of a buy back, it would have the same effect?

So_Cynical · 25 June 2011

daunus said:
Also on a related issue, when a company does a share buy back, where do those bought back shares go? Do they cease to exist and everybody's slice of the pie simply get bigger?

The shares brought back are usually cancelled, so yes everybody's slice of the pie gets bigger.

daunus said:
Why not simply just give out a bigger dividend then instead of a buy back, it would have the same effect?

Half a dozen of one and six of another, my slice of the pie betting bigger over time should lead to increased dividends that are more sustainable....a lot of company's that got into trouble in the GFC had to issue a lot of new shares to raise money and so buying a few back is a responsible way forward.

There's something that's just not right about a big stock with a low SP due simply to the fact that they have to many shares on issue.

alphaman · 26 June 2011

daunus said:
Why not simply just give out a bigger dividend then instead of a buy back, it would have the same effect?

In valuation theory it's irrelevant whether you return funds to shareholders through dividends or buy back. In practice, I also find it pretty much irrelevant.

danbradster · 26 June 2011

alphaman said:
In valuation theory it's irrelevant whether you return funds to shareholders through dividends or buy back. In practice, I also find it pretty much irrelevant.

The buy back can be better for continuing holders, taxation wise.

McLovin · 27 June 2011

daunus said:
Why not simply just give out a bigger dividend then instead of a buy back, it would have the same effect?

Buybacks are often structured so that they have a large dividend component. The BHP one earlier this year was $0.28 capital component and the remainder was a fully franked dividend. The sale price would be deemed to be $0.28 which also means you get a large capital loss on the sale which you can use to offset against capital gains. Bit of a rort really.

Tysonboss1 · 1 July 2011

daunus said:
Why not simply just give out a bigger dividend then instead of a buy back, it would have the same effect?

So they can do a once off capital return to shareholders without increasing dividends.

for example-

Iron ore and oil prices may be strong for a few years resulting in BHP having large amounts of cash which they wish to return to share holders. these strong cash flows may not last forever so the company would not wish to raise dividends or they would just have to reduce them in the future which means shareholders would be confused as to the future direction of dividends.

By buying back shares they are still maintaining the current divy, but also returning the cash in a tax effective way.

Tysonboss1 · 2 July 2011

Tysonboss1 said:
So they can do a once off capital return to shareholders without increasing dividends.

for example-

Iron ore and oil prices may be strong for a few years resulting in BHP having large amounts of cash which they wish to return to share holders. these strong cash flows may not last forever so the company would not wish to raise dividends or they would just have to reduce them in the future which means shareholders would be confused as to the future direction of dividends.

By buying back shares they are still maintaining the current divy, but also returning the cash in a tax effective way.

watch this vid from the 10min mark.

.

timestwo · 8 June 2012

sorry for bumping an old thread, did a search for net worth and came to this thread. how would you go about calculating the net worth of a company? so you have the financials say total current assets and liabilities but if the liabilities are more than assets would that mean that the company is worth -ve dollars? how does this value then translate to calculating how much the share is worth for that particular company?

Difference between market cap, equity and net worth of a company?

Leroy42

danbradster

Leroy42

danbradster

daunus

So_Cynical

The Contrarian Averager

alphaman

danbradster

McLovin

Tysonboss1

Tysonboss1

timestwo

Similar threads

Difference between market cap, equity and net worth of a company?

The Contrarian Averager

Similar threads

Privacy & Transparency

Privacy & Transparency