It's a bit hard for me to wrap my head about this "borrowings" as being part of the positive part of the equation. I understand that if you want to buy the company, then you need to pay that off, but is that really "value" in the way the article says to compare companies?
- Imagine a company with 0 market cap and 0 cash, but 100M in debt. That company would be "enterprise valued" at 100M.
- How can you compare that to a different company, let's say at 100M market value, with 0 debt and 0 cash and say they are the same for "enterprise value"?
- Or to go even funnier, an arbitrary high market value, let's say X + 100M, with an arbitrary large amount of cash, let's say X, and say that both of those companies have the same "enterprise value" as one company that has 0 market cap and 0 cash but 100M in debt?
When trying to get a "peasant estimation" of how big a company is (not in a "how much it'd cost for me to buy it" way), which is what the article is trying to argue, I'd say that it should be "market cap + cash - borrowings". Or maybe not even include the cash and borrowings, or do some more advanced calculations I don't know about, since the market probably accounts for those indirectly on the market cap!
For your company A, you need to pay 0 to buy all its share, and also pay 100M to the lender to have full-control of the company.
For your company B, you need to pay 100M to buy all its share, and also pay 0 for the debt.
So they are both going to cost 100M for you as potential buyer.
To expand a little bit, actually the "cost to buy" should exactly be how "valuable" it is. But why does it feel counterintuitive? Because when we're thinking about buying something, we usually don't really logically.
Say you want to buy a car at $10000. But it also has a broken AC and you have to fix, which costs you $1000. At the end of the day, to buy a "car with a working AC" you paid $11000. That's the value of the car.
But most people will think they "spent $10000 to buy car that actually only worth $9000". Is that true? For a totally fair market, you CANNOT buy the same car with working AC for $10000. It would be priced as $11000. Same goes for the company -- a company the has exactly "same" inherent value", whatever that means, but no debt, would have higher market value than the one with. So the market value, at least in theory, already reflected that difference. Hence you can add it together with the debt to get its "true value".
I had to re-read this few times but I think it makes sense now. So what you are saying is, that if a company goes into debt, the market will also lower its valuation because it has debt, so we should not count this debt twice and that's why we need to add it up?
I think we might be missing "assets" here? This is what still doesn't make sense for me:
- A company just created (market cap 0) goes 100M into debt, and so has 100M cash, so it balances out to be 0.
- However if that company uses those 100M cash to buy e.g. a factory, in this example what would happen? The Market Cap jumping to 100M doesn't make sense (since then the company would be "valued" at 200M), should we count the "assets" in the same way as "cash"?
>- Imagine a company with 0 market cap and 0 cash, but 100M in debt. That company would be "enterprise valued" at 100M.
The fallacy here is assuming that market cap is an independent variable, whereas in real life it's dependent on cash/debt. This makes sense, because a company loaded with debt would be less valuable to shareholders, since the debt has to be serviced which eats into future profits. If you set all 3 values arbitrarily, of course you're going to get absurd results. It's not any different than setting the side lengths of a right angle triangle to arbitrary values, then complaining that the Pythagorean theorem is broken.
In other words market cap is assumed to be representative of the company's "actual value" (i.e. whether it is a good investment, profitable, whatever) and the other variables are meant to correct for factors the market cap presumably does not consider.
But that is still counter-intuitive if we use an intuitive understanding of "value" (i.e. worth preserving/having/acquiring). The company in this example would have no worth but EV of 100M. If you buy it, you would have gained nothing and spent 100M. Realistically with (near) zero market cap the company is likely defunct or worthless, with zero cash and massive debt it's likely bankrupt.
Realistically it's just a base "buying price". To fully buy out and own a company you would need to buy all the stock (market cap) and then pay off all the debt but you could use the cash for that. That's "value" in the modern economical "market price" sense, not in any intuitive sense. And it doesn't even mean paying that price would be a good investment because two different companies may have the same price but be hugely different in terms of potential ROI. Notably it only accounts for assets in the sense that the market cap might consider them - but we all know (do we?) that the stock market is not rational even when it can be rationalized otherwise we would be better at predicting it (notably a lot of "experts" perform worse than chance when trying to predict it).
I guess if you wanted to account for value in the sense of "worth" the formula would have to be a multiplier of the share price as a share price of zero would presumably mean the market sees no use in it and the other factors don't matter (but then again there's no good reason why debt would factor into it positively because it's merely a proxy for capital based on the assumption that it's used for investments rather than cashflow).
I did touch on this: "Or maybe not even include the cash and borrowings, or do some more advanced calculations I don't know about, since the market probably accounts for those indirectly on the market cap".
If they are not independent variables, then it's also not fair to plainly add variables that depend on each other, since they will give a skewed value given that simple addition would assume they are independent.
The submission doesn't state it explicitly, but a firm's debt enters its Enterprise Value at its market value, not its nominal value [0]. If an openly traded company (a company that has non-zero shares) had a market capitalization of zero dollars, the market value of a bond issued by it would be, most likely, also zero, or very close to zero, even if its face value were non-zero.
If the market values a firm's stock at zero dollars because it isn't expected to increase in value nor to pay any dividends at any time in the future, then it wouldn't be expected to pay back any of its debt either, and so the market value of its debt would also be zero.
As I understand it, the majority of debt of car companies is used to provide leases.
So e.g. GM borrows money at X% interest rate and gives credit to customers at X+Y%.
Y% is their profit. So the bigger the debt, the more additional profit they make.
This is also a ticking bomb because leverage generates more profit when times are good but increase losses when times are bad.
That Y% finances the risk that a customer will stop paying.
It also comes from GM being able to re-sell the car after the lease for more that it's worth ($PriceOfCar - $TotalLeasePayments).
When bad times come, like in 2008, those companies are hit with double whammy: people have less money, so more people abandon the lease. And also buy less cars so car prices drop so re-sell value drops.
So suddenly GM has losses and cannot afford the debt payments and that's how they go bankrupt.
If you acquire the company, you assume it's debt, too. So that's a liability you assume, meaning you have to pay that on top of paying for the market cap of the company. You also get the cash, which is a reward for buying the company. So to buy the company and pay off all the debts.
Example:
- Company Stock is worth market cap of 2 billion.
- Company has 2 billion in debt.
- Company has 1 billion in cash.
2B (acquiring all the stock) + 2B (paying off all the debt) - 1B (cash in the bank) = 3B (enterprise value, aka the effective price to buy the company w/ no debt).
Some people call the enterprise value the true price of the company.
I think the confusion lies in the word "value". To use your example of Company, imagine another company (Company2) exactly the same as Company but without the debt. Enterprise value of Company is 3B, enterprise value of Company2 is 1B. But Company2 would clearly be preferential to acquire, because it has no debt, despite the much lower enterprise value. So enterprise "value" is not a useful measure of "value". Am I misunderstanding something here?
The part you're missing is that the 3 variables aren't independent of each other or of the underlying company. You'll never have two 'identical' companies that only differ in one of those variables.
If company 2 has the same market cap with zero debt as company 1 has with huge amount of debt, then that implicitly means that the market values what company 2 does less. Perhaps they're in a market with lower growth or have a smaller market share or have a product with less upside potential or have huge lawsuit hanging over them.
If company 1 and company 2 did the same thing and had the same profits and sales, but the only difference is that company 1 had a lot more debt, then the market cap of company 2 would almost certainly be higher than the market cap of company 1. In fact you could then use the Enterprise Value formula to work out what the market cap of company 2 'should' be.
Ok I understand what you're saying, but this is still treating debt as a negative despite the fact it has a positive influence on the enterprise value.
Imagine this example. I'm CEO of Company2 and I take out a 1B loan. Enterprise value is still 2B, because 1B debt is cancelled by the 1B I now have in cash. I then waste all the cash on whatever. My company's enterprise value is now 3B, because the debt has increased it without being cancelled by the cash.
Depends on what you did with your cash. If you wasted it on something (perceived as) 'stupid' then your stock price would go down, lowering your market cap and your enterprise value would stay the same. If however you invested that cash into something perceived as 'smart' then your company will now be better off in some dimension, and thus it makes sense that your company will be worth more.
Equally if you are able to take on a lot of debt without it lowering your stock price then that means that the market thinks you're going to use that new money in a smart way to grow your companies value and thus your company is more valuable. If the market didn't believe you would use the debt wisely, taking on debt will lower your stock price.
In the real world you effectively cannot change the amount of cash or debt you have without it affecting your market cap in some way, as all three are tied together in complex ways and this model doesn't offer any insight into how changing one value will affect the others or the overall value going forwards. Think of Enterprise Value just as the price tag of a company at any given moment in time.
Gotcha. To go back to the article, it compares Tesla vs Toyota's market cap (558 vs 329) and then their enterprise value (553 vs 466) and concludes that if we look at EV then Toyota has almost caught up. What this reveals is that the market has decided that Toyota is in a good position ("valuable") because they have a market cap reasonably close to Tesla despite a lot more debt, so there is inherently some extra value in Toyota (according to the market) not captured by just looking at the diff between Tesla and Toyota market cap. It also reveals that Toyota believes they're undervalued which is why they're using debt financing instead of shares, whereas Tesla thinks the opposite.
Consider the opposite. The company has a market cap of $100bn and $10bn in cash. If you buy the company out for $100bn, you automatically also get $10bn cashback. So it's more like it is worth 90bn, plus has some cash attached - but that bit is a wash.
Debt is negative cash, so instead of subtracting it from market cap, you add it in.
Isn't this a strange way to put Toyota to be "closer" to Tesla by "enterprise value"? I mean, if toyota had 1T USD debt, it's enterprise value would have been 1.25T, and it would have been more "valuable" than Tesla. But, how is that "better", if you want to invest in a company?
I'm surprised TSLA is in such a good shape, debt-wise.
A way to look at it is that "even though it has x debt, it's still worth y". For instance, imagine you have a choice between two sports players. One is currently sick and scores at one goal a game. The other is in great health and scores at one goal a game. Which player do you pick?
Though of course he mentions it differently: how much would you have to pay to acquire all of the surplus from the company? You'd have to buy the company and it's debt.
Somewhere towards the bottom, the post explains that "the price to buy the business and gain all its economic value is the enterprise value." So if you want to buy Toyota, and reap all of the profits, you buy all of the stock and all of its debt. Toyota and GM become much more expensive this way.
> I'm surprised TSLA is in such a good shape, debt-wise.
As the post also notes, "a high share price relative to your true value constitutes the ability to finance cheaply."
If Toyota had 1T debt and kept its its current market value then it would have to be doing much better then it is. If it could not afford the debt it would be priced in.
Companies with enterprise values higher then thier market values are not better investments.
I think what you're missing is that lenders don't lend blindly. They expect to be paid back. Just as an investor expects to recoup their investment. Buying a bond (i.e. a loan to a company) is as much of an investment strategy as buying a share. Bonds come with less risk and limited reward, shares the opposite.
From the company's perspective, it has a queue of claimants who expect to be paid and the company will pay them with its profits. The queue order is roughly determined by whether the claimant holds a bond or a share (and further determined by legalities and complications within those two broad classifications. It's complicated™).
If you could walk up to anyone in the queue and ask to take their place in line, in exchange for cash, "enterprise value" is an estimate of how much it would cost to buy everyone's place in line. Or, the sum of how much everyone in line values their place in that line.
Thus, in this metaphor, Toyota could decide to sell new places in line to finance the construction of a $1T factory. But, only if people believe the factory will actually produce > $1T in new value.
Exactly, I argue here (https://news.ycombinator.com/item?id=39754171) that "market cap" is probably better than this strange "enterprise value" for the stated goals of the formula, which is to compare how valuable companies are in an intuitive way for your average person.
My point being that the market cap already includes (partially) the debt and cash priced in, while this whole debt is positive, cash is negative is "if you wanted to buy the company". We do not use "country debt" to measure how "valuable" a country is, we use GDP for a reason.
> But, how is that "better", if you want to invest in a company?
This is exactly out of the scope of the article. So if the question is what you should invest in this is probably not a good metric.
The question the article answers is how to most efficiently finance your own company. It would seem like Tesla has financed selling its own stock, indicating that they think they are overvalued, where Toyota has financed selling their own bonds, indicating that they think they are undervalued.
If you trust their own assessments and want a good deal, then you should probably invest in Toyota over Tesla.
If we're really digging into it, the actual value of a company should be the amount of money you need in total to buy it. Including the parts that are not for sale (so not just the public shares)
That also means for instance convincing the US gov to let you have Tesla, and vice versa convincing the Japanese government and all Toyota's debt holders to not intervene in case of a Toyota buyout.
And that becomes a completely different story with undefinable numbers and so much more politics.
>If we're really digging into it, the actual value of a company should be the amount of money you need in total to buy it. Including the parts that are not for sale (so not just the public shares)
That doesn't make any sense. The "actual value" of something must include what people are willing to pay for it, not what the existing owners are willing to sell at. If I have a trinket that I'm not willing to let go for less than $1M, the "actual value" isn't suddenly $1M.
But then what does "actual value" means if you can never ever buy it at that price ?
The same way you posit the vendor price can't be taken at face value, the buyer's price can't be the measure either (my wife's totally willing to buy my trinket for the sum of all of our possessions. That makes it quite a valuable thing right ?)
Buying the debt is different than paying off the debt. I see so many comments here assuming that to buy the company totally (or to have total control over a company), one should pay off all debts of the company. It is simply not true. I feel this whole concept of "Enterprise Value" does not really correlate any meaningful value.
Simplistic valuation is not particularly useful. Take even just 1 more factor into account, Japan's tremendous debt and multiple lost decades and inevitable nightmare situation. Toyota basically doesnt exist until they built their bzx4 factor in the usa. https://www.bloomberg.com/news/articles/2023-03-27/fears-of-...
From the public information I know about Toyota, they are about 15 years behind Tesla.
Comparatively VW is probably only about 5 years behind now. GM/Ford are about 7 years.
So is tesla more valuable? It's practically infinite money more valuable. GM could spend $100 billion to try to catch up and could not. Its not about money, it's about the people who work for them.
The enterprise value is the total value of the company: The value of all stocks and bonds in circulation (minus the cash, assuming you use that to pay out bonds).
Why is that a bad term?
I do appreciate that this does not ring will with a layman's interpretation of stocks on bonds. But think about it.
If you have a house that is worth 1M and take out a loan of that house at 500k, is it now only worth 500k? No, it is still worth 1M. And prospect buyers will need to buy that bond (unless you want to keep paying it off even though you don't own the house)
It's just that in my book, value = what I get, not what I pay.
Since this metric include the market cap, a Chinese OTC shell company can have an 'enterprise value' of several hundreds millions, even though everybody knows it's worth nothing.
Maybe it's just me though - I like value investing.
Indeed, this happens often. Like buying a house under the financial crisis and taking out a loan on unreasonable valuations.
This is btw. exactly what the article talks about. You should use the most favorable way to finance your company: Stocks when the market thinks you are worth more than you think and bonds when you think you are worth more than the market thinks.
Only one (dismissive) side note about self-driving in the article.
I have yet to hear a solid argument against Tesla achieving full self-driving within the next ten years.
Self-driving will automate billions of daily man hours.
Capturing even just a very small fraction of that value results in enough earnings to justify Tesla's current market cap. Even if you have to discount the earnings for another ten years, in case it takes so long to start selling FSD software.
Talking rationally about FSD always results in reflexive downvoting here on HN. Which I take as a sign, that the thinking about Tesla's future is muddied by emotions among many people. Maybe because people can't imagine fundamental change and also fear change.
The only argument I have is, well not so much an argument, but more an observation of a fundamental. Will we be able to get enough compute power without using too much power into a car to do the task? A few years back I would have said "No", but progress is still stumbling along and I am now in the maybe pile.
If we can get the compute power, I cannot see a reason why it cannot happen but it might still be longer than 10 years away.
I think the issue with FSD and Tesla is just how many bold claims from Musk have not come to pass, it is a boy who cried wolf situation. It is my usual criticism is Musk and most of the companies he runs. They are awesome companies in what they have actually done. Anyone would be proud of even half the things Telsa or Space X have done. So why does he always how to go the snake oil sales man route and way over promise? It kind of drags down the excitement for these things.
> I have yet to hear a solid argument against Tesla achieving full self-driving within the next ten years.
You haven't heard a solid argument against me personally achieving full self-driving either, but that doesn't make it realistic
You are also assuming they are able to sell their FSD for a profit, and aren't out-competed by e.g. Waymo. Maybe Tesla does make full self driving a reality, but only after Waymo has licensed a better version of self driving to Toyota who sell millions of automated cars before Tesla
Not denying your point, but the people who drive those Mercedes, are not exactly the same people as the ones buying Teslas and posting their successful rides all over the place.
Well, the arguments against goes the same way - if the system was no good, you can be sure that Tesla promoters would have posted 100s of videos of it already.
The fact that they didn't, tells me it's not that bad.
I do not think that the argument "If the Mercedes-Benz system is so good, then where are all the youtube videos?" is a stronger argument than "If the Tesla system is so good, then where is all the regulatory approval and the full legal liability?"
The latter seems much harder to game, to me.
Also, since you've put the goalposts here, I just looked for these videos and other reviews of the MB-system. What do you know, they do exist.
But not in the same category as regulatory approval and full legal liability.
IDK, this is pretty much what I said above already, just in slightly different words. But whatever, you put your full trust and faith in youtube instead if you want.
Then it's odd that the people with the cool videos didn't manage to get the "easier" regulatory approval. I already said that in different words in a comment above, maybe you missed it?
A video on Youtube is not a "better indicator" for anything serious or requiring certification. It is an entertainment platform at best, spammed full of disinformation and bias. Preferring it over anything else that has legal weight is some kind of credulous joke. But this just restates my above comment on which is easier to game, edit or cherry-pick.
Also, when third or fourth player enters the market. Would FSD not be commodity tech? Just buy a license and then every automaker will have it. At that point it is race to bottom, any self-driving car likely only making small margin over lifetime...
How would Waymo with their sensors bolted onto vehicles they gotta purchase and modify (currently costing them over 200k) outcompete Tesla’s extremely lean manufacturing prowess where they make entire vehicles with all the hardware needed for $20-30k?
> 1) We’re talking about a scenario in which Tesla does achieve FSD
I'm talking about the scenario where Waymo achieves full self driving at a cheaper per vehicle cost than Tesla (once their self-driving is good enough they will pivot to reducing the sensor costs)
Well first of all, you can’t purchase it in the US. It doesn’t exist. Apparently you can order it in Germany, but even then who cares? It’s a traffic assist system, below 30mph or so, needs to closely follow a lead car, and it would probably still shit the bed if something fell out of said car. Mercedes made the conditions so tight they’re just willing to take the risk for the PR fluff they received. Complete garbage.
And with all that, not a single fucking video on YouTube from an owner casually using it
Why would Tesla be the only one with FSD, they are currently behind in abilities compared to (currently hideously expensive) models form tradional manufacturers.
Let's assume that you're correct: Tesla achieves FSD in the next decade, and it automates billions of daily man hours. That's only really relevant to Tesla's current market cap if you also assume that other car makers don't achieve FSD in the next decade.
If everyone has FSD, then in terms of relative company value it's the same as no one having it; it's just another feature, like A/C or cruise control.
If self-driving works it's inevitable that the market will transform from mostly selling cars to mostly providing robotaxi service.
Robotaxi service has "winner takes most" dynamics, just like regular human-taxi service. Just look at how stable Uber and Lyft marketshare was over the years.
Imagine company X drops 10 thousand robotaxis in San Francisco area. Anyone who cares to can get a taxi for half the price (or less) of regular taxi.
Company Y develops self-driving technology 6 months later. There's just no way for company Y to re-take significant market share in San Francisco if their costs are similar to company X.
They can drop 10 thousand cars but most San Franciscan who want such service already have app for service X installed and a habit of using it.
Company Y might decide on (expensive) marketing campaign or price war but company X can do that as well. Company X can finance price war from profit but company Y must borrow. And there's only so much you can borrow.
In US we saw this with Uber vs Lyft vs everyone else. Early market share of Uber proved to be bullet proof regardless of what Lyft tried to do.
In China Uber was in a trench price warfare with Didi and when they didn't see a way to win, they decided to loose (and sold their business to Didi).
So the winner of robotaxi market will be the first company that has a working self-driving software AND can produce millions of cars per year to capture the market.
Either way, Tesla cars will become robotaxis at some point.
If a robotaxi does 10 rides for $15 per day, that's $15x10x365=$54,750 per year. If operating the car costs $20k per year, that's $35k profit per year.
It doesn't make sense to sell a car for $30K if it can make $35k in profit per year.
I thought that Waymo is 'almost' a robotaxi - in the sense that there is a remote operator that takes over when the car is stuck or it's getting dangerous. I think Cruise revealed the numbers about the % of time an operator takes over and it was surprisingly high - one intervention every 2.5-5 miles.
it doesn't matter what the back end looks like. even if it's all just a call center in the Philippines driving the cars with playstation controllers, on the customer end, there's an app, and it summons a car with no driver in it, and it takes me to my destination.
Their profitability relies on just how much that call center needs to get paid, so it's in their interests to drive that down, and have it be real, but that's their business. As a customer, all I know is that there's a competitor to Uber/Lyft called Waymo, and it's better and worse in specific ways.
No driver means no having to deal with a person. If I'm sending a girlfriend home late at night, she doesn't need to get into a strangers car. the driver could be drinking or hit on her or whatever. robo taxi isn't going to do that, even if it's a call center in the Philippines.
Ok, that's not what I call a 'real' Robotaxi. If the operator needs to intervene maybe once per 100 miles then I would consider we're close.
Re profitability - yes, but if there is more than one companies, they will just drive down the margins. I don't see how it will generate billions frankly.
Other automakers still have software literally worse than a 2013 Model S. They’re still the blackberries of a newly iPhone automotive world. They can not compete with Tesla’s fleet data, OTA updates and widely deployed uniform self driving hardware. Mobileye provides basic ADAS to automakers but they’re hella behind FSD12 and don’t have the kind of deployment capabilities Tesla has.
When the CEO declared that FSD was a "solved problem" EIGHT years ago, then there is good reason to doubt it will be solved in another ten. People who bought cars eight years ago and paid a premium for the promise that their car would have FSD basically lit thousands of dollars on fire because their car is approaching end-of-life, and it still can't drive itself.
> Talking rationally about FSD always results in reflexive downvoting here on HN.
Its hardly a reflexive downvote when you say you haven't heard any solid arguments, when musk has been promising it "next year" every year since 2014 (i.e. the last 10 years). What solid argument do YOU have that the next 10 years will be any different?
The progress. Tesla's FSD, which is very publicly documented, is steadily getting better. There is no sign that the effect of throwing more compute and data at it will slow down.
> I have yet to hear a solid argument against Tesla achieving full self-driving within the next ten years.
You've already asked the same question a few times. Here's what I posted the last time you did (you didn't respond):
Years of deliberate false statements by Tesla about their self-driving capacity should make any rational person very skeptical of their future claims.
Having a CEO who is obsessed with posting far-right-wing political statements on Xitter over managing his actual businesses is also a red flag. What rational manager goes out of their way to alienate at least half of their potential customers?
I am firmly in Tesla's target audience, but under no circumstances would I buy one, if only to avoid the social embarrassment of being associated with this pathologically mendacious malignant narcissist.
"enterprise value = market cap + borrowings - cash"
It's neat and not too long.