- The cash balance that is netted out against firm value
usuallyisfromthemostrecentfinancialstatements.Tothe
extentthatthereareseasonalfactorsaffectingexpensesand
cashbalances,usingthemostrecentcashbalancecanskew
themultiple. Forinstance, assume that a firmbuilds upa
largecashbalancetowardtheendofeveryDecembertomeet
largecashoutflowsthatitexpectstoincurinJanuary.Using
thiscashbalancetocomputeenterprisevaluewillresultina
low enterprise value multiple (and perhaps a buy
recommendation).Inthepresenceofseasonalvariationinthe
cashbalance,itmakesmoresensetolookattheaveragecash
balance over the year rather than the most recent cash
balance.
2.Reemphasizingwhat wassaidin Chapter9,when using
enterprise value-to-capitalratios, cashshould benetted out
against the book value of capital, just as it was in the
price-to-book calculation:
The failure to adjust for cash in the denominator will
generally bias multiples downward, and more so for
companies with significant cash balances.
Notethatthecashadjustmentisrobusttovariousactionsthat
canbe taken bythefirm thatreduce oraugment thecash
balance.Afirmthatpaysalargedividendorbuysbackstock
willreduceitscashbalancebutthemarketvalue ofequity
will also decline by an equivalent amount. A firm that
borrowsasubstantialsumjustbeforetheendofafiscalyear