Hello,
LGEN displays a negative enterprise value.
Could someone explain this for me?
Many thanks in advance for any assistance
Charlie
Your distant relation
Lots of cash.
AV. (Aviva) has even more.
Among the smaller cies LAM (Lamprell) & PVCS.
There used to be a screen for this.
My question would be 'what has happened to the Negative Entreprise Value Screen?'
Hopefully this will make sense...
When valuing a business you can crudely look at the market capitalisation. A big, valuable business will generally have a bigger market cap. To improve your valuation you could then look at debt - most businesses have some debt - so it makes sense to look at the market cap and then add on the value of the debt. That is a better value of the business (after all shares are a bit like debt at the end of the day - shareholders lend the company our cash in return for a future flow of dividends from the business, whereas a bank gets it's interest payments). So if a company has market cap of £100m (we've lent the company £100m) and the banks lend the company £150m then it is likely the business has an enterprise value of £250m (shareholders loans plus the bank loans). In the case of Legal & General (LON:LGEN)... there is no net debt whatsoever, in fact it has net cash in the bank. The net cash is in excess of its market capitalisation - so take away the cash from the market cap and you have a negative enterprise value.
Market Cap £15.29bn
Net debt £-15.73bn (i.e. £15.73bn in the bank)
Take the debt of the market cap and you get an enterprise value of approx minus half a billion. One measure of many (in my opinion) that suggests that Legal & General (LON:LGEN) is quite cheap at the moment.
Two useful posts, Tks.
So then the question arises, does one buy?
A few years ago BLVN (Bowleven) farmed out an oil & gas strike to a Russian cie and got huge payouts.The directors paid themselves richly and did nothing. Last year they were kicked out by a Monaco registered cie that virtually took over the company BUT none of this has done anything for the share price. Even today it has a negative entreprise value.
Just to expand on that last explanation (post 3).
Enterprise Value , essentially creates a theoretical separation between the operating business and it's net debt / net cash.
So in the case of Legal & General (LON:LGEN) (based on the figures currently on stocko) there is
Net Cash of £15.66Bn, compared against a market cap of £15.39Bn in theory valuing the operating at negative £0.36Bn (the entreprise value).
In theory this means that you could buy the business for £15.39Bn; pay yourself back out of the cash-pile and still be left with £0.36Bn and the operating business.
That all though assumes that the cash is truly "surplus" and without lien.
I very much doubt that is the case here. In truth I know very little about the numbers for Legal & General (LON:LGEN) but essentially their business is "money" so unless there is any evidence that this cash is truly surplus, it is imho probably more realistic to consider it as "inventory".
To cite another example : GAME Digital (LON:GMD) also has a substantial apparent negative Enterprise Value , due to a significant cashpile. I made the argument in comment number 37 here that in fact that cash is effectively awaiting payment to suppliers (in is probably much lower at other times of year) so if there is a surplus in GAME Digital (LON:GMD) it is really inventory rather than cash.
Bang up to date, an example where a negative EV is I would say real we have Volvere (LON:VLE) (the figures won't reflect this yet as In refer to a transaction announced only today.)
Market cap is £40m (after the price has risen today) and by my reckoning following completion the disposal announced today, net cash of c. £43m.
Following the disposal Volvere (LON:VLE) owns two relatively small businesses and has the cash-pile totally separate from them. So in theory that cash-pile is freely distributable to shareholders so the EV calculation makes sense imho. (It's actually unlikely the cash will be passed back to shareholders, given that Volvere (LON:VLE) 's business model is to buy distressed companies nurse them back to health and sell them on at a profit).
So my view is that a negative Enterprise Value can be a useful indicator, but care is needed in understanding what the cash is actually there for.
Hope that makes some kind of sense!
if i could give this +10 upvotes i would.
this is the same reason a lot of banks trade for less than cash
Hi Charlie,
I've owned LGEN in the past and would happily do so again. It throws off a lovely dividend which is growing slowly,business seems to be growing in Asia, has a high ROE. It could suffer in the event of a hard Brexit but I think its a nice Co to park some cash in. Its not going to shoot the lights out though but if you are taking a long term view you shouldn't go too far wrong. I sold it to add to my position in SOM which I think will help me get where I want to be a bit little quicker! As ever DYOR! Des
