The First Cut: Using Enterprise Value to Locate Bargains

    by John Bajkowski

    The First Cut: Using Enterprise Value To Locate Bargains Splash image

    The First Cut is designed as a starting point for investors. Each issue we list the top 30 stocks that pass relatively simple screens of interest to individual stock pickers. AAII’s Stock Investor Pro screening software is used to generate the First Cut listing.

    While market capitalization (stock price times number of outstanding shares) reflects the overall trading value of a company, it does not fully capture the cost of acquiring a firm. Instead, investors turn to the “enterprise value” to help measure the overall outlay of buying out a company. The enterprise value is calculated by adding market capitalization, preferred stock, and total debt and reducing this total by the amount of cash held by the firm. Debt and preferred stock is added because the acquirer must shoulder the cost of assuming the obligations of the firm. Cash is subtracted because once you acquire the firm, it becomes yours.

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