This is one of my articles in the line of financial ratios and this time I'll write about what's the Enterprise Value Financial Ratio. It's not about the Enterprise Starship from Star Trek hehe :p

Enterprise Value is a value that theoretically can tell you how much would and should someone pay for a company in order to buy it. It's what the name says. Enterprise Value is a quite accurate estimate of buying cost and is a better indicator of value than the other financial ratio called Market Capitalization because it takes into consideration more factors than the latter.

How is it calculated?
The calculation is very simple(first the theory :p)

Enterprise Value = Market Capitalization + Preferred stock + Outstanding Debt - Cash and Cash Equivalents

in other words, enterprise value is the amount of money you would pay to buy every single share of a company's common stock, preferred stock and outstanding debt. The reason the cash and cash equivalents is subtracted is after you buy the company you own the cash too. Sounds a little silly to buy cash with cash, but the cash that you pay goes to the owner/owners of the company, and the cash in the company is the cash needed for the company to run. You wouldn't want your newly bought company to have cash problems in the first day :p

What is the Market Capitalization(aka market cap, mkt cap or capitalized/capitalised value) ?
Market Capitalization is simply the result of the multiplication between the number of outstanding shares of common stock and the current price-per-share. Sounds complicated? Because of the terms used...

Try to follow this example: Company X has 1 million shares of stock outstanding and the current stock price is $130 per share, the company's market capitalization is then $130 million( 1 million shares x $130 per share = $130 million market cap).

What is the Preferred Stock ?
One definition is that Preferred Stock is the opposite of the common stock described above in the Market Capitalization calculus. Preferred stock is the participation of a larget investor in the company, investor which could require a fixed dividend or a share of the profits of the company.

What is Debt ?
If you acquire a business, you acquire it's debt also. If for example Company X has a market cap value of $130 million and a debt of $20 million, then you spend $150 million. $130 million needs to be paid now and you are now responsible to pay the $20 million in debt from the cash flow of the business or from other sources. That can affect the strategy of the company on short term or longer term. Preferably is for the debts to affect as little the company as possible and for as short of a term as possible.

What are Cash and Cash Equivalents ?
Once you acquired the business you own it's cash legally. After you own it, you can do whatever you want with it, take it and put it in your pocket, reinvest it in the company, pay the employees a bonus for buying the company, etcetera. Ofcourse the best thing to do is to use it to invest in the company further, but this varies from case to case. Basically it can also serve to reduce your acquisition price and because of that reason it is subtracted from the other components when calculating enterprise value.

What's the importance of Enterprise Value ?
There are investors who look at the enterprise value in relation to the cash flow to see if they're generating a lot of cash flow because that would mean there's little need if any to invest in the company, the company is moving alot of money from left to right on the products it sells and things run smoothly. These investors would then not be forced to reinvest the profits back into the company and they could use these profits to finance other investments.
Also a good application of Enterprise Value in relation with other ratios is to see if a company is overevaluated, evaluated properly or underevaluated.

External links:
Enterprise Value on Investopedia

Enterprise Value Gets Into Gear

Enterprise Value on Wikipedia(Very nice article but more technical)

If you are a stock market investor then you should know about indices and financial ratios,if not, still they're a good read and a good thing to know especially financial ratios and especially if you have a company. Some say if you are a prudent stock market investor, then you will not invest in a stock without understanding it's company financials. I'd say if you don't understand the company's financials then you shouldn't invest in stock market.

It's so important to know what a balance sheet is, and a cash flow statement or a profit & loss account that many investors base their investment decisions only on these statements. They do not bother to calculate the financial ratios, but I believe that is a mistake because financial ratios can indicate business trends and profitability. Also it's very useful to compare these financial ratios with the industry's standards to give some pretty good predicaments about where the company is going, to success or to bankruptcy.

The bottom line is that you need to work out financial ratios before you invest in a stock. For that you will find on this site, starting this week, some articles about financial ratios with short easy to grasp descriptions about how they can be calculated if they're missing and what purpose they can serve.

One very good external source for reading about financial ratios is wikipedia and you can find the page here:

http://en.wikipedia.org/wiki/Financial_ratio

or you can find an index of financial ratios here:

http://en.wikipedia.org/wiki/Category:Financial_ratios

Good Luck!

While I was surfind the net for nice interesting financial sites on the internet and interesting financial courses I found this movie in a squidoo lens and subsequently on youtube:

While this has the aura of a motivational movie and of an advertising movie to Robert Kiyosaki's programs(and it is) it's still a nice informational movie. Robert always gave me nice inspiration and gave me alot of ideas and he taught me a better way to think about money, and for that I'm grateful. Out of my appreciation for Robert I have an ad to his book "Rich Dad Poor Dad" on the left side of this blog. I highly recommend you go get it and read it through and start thinking what you learn from him and after that tell me what you think :)

All great things come to those who save.

This quote is original as far as I know and it reflects something I really believe. It may not be all great things, but still savings are very very important, so important that they are a constant throughout the history of finance starting from the ancient Babylon city going till our days. In these times, we as normal people have more money than we had in all history and have greater possibilities to spend them them much faster than we make them. That is not necessarily a problem even though it's a thing to consider, but the fact that we have so many possibilities to spend the money made us at first ignore what we learned at home from our parents when we were young kids, and then to forget alltogether the fact that we should from time to time put some money aside in a piggy bank.

Now some people might say that if one puts $1000 in a bank due to the inflation rate and lately with our recession in one year from now, we'll have less than our interest could compensate, and I fully agree with those people. Putting money in a bank is not an investment, you're only gonna lose them. But then again you must create this essential habit, a habit of putting money aside, because even if you lose some of that money, it's better to have the rest, and not spend it all on various stuff. Another very important reason to learn this habit is that the right time will come when you'll have a small treasure and will be able to use that treasure for something you like, or invest it in something that will bring you more money like some stock actions with dividends or a house that you will rent, or who knows what other type of business or investment opportunity will find your way. Opportunities are always lurking and searching for people that are ready for them. In order to be ready, you have to be able to recognize an opportunity, but also to be able to take advantage of that opportunity. Otherwise, at the end of the day, you'll only gonna whine that so many opportunities passed right in front of you but you didn't have enough money to seize them. I don't know about you, but I feel so much joy when I see my small fortune getting bigger and bigger, but how much of our paycheck or general income should we start putting aside? Some say as much as you can, other say 10%, other say 30%, while even others say that you should start with 1%, and the list could go on. I say that 1% is good for making a habit, but very soon you're gonna want more :) 10% might be the perfect sum, and this number comes from very old times in the Babylonian era, in the form of pitoresque stories that describe how the city of Babylon became so rich and powerful in a world of instability and in the desert. At that time there were also very rich people and very poor people but The Richest Man in Babylon spread his teachings to 100 teachers which at their turn spread what they learned to even more people, but only in the city of Babylon. One of these teachings is to keep 10% of what you earn and live with the rest of 90% even though it might be harder, but to understand that your general living habits won't be affected that much. I tried and applied this strategy it worked pretty well :) I started praising my little treasure and as time passed I could think of nothing else than how to make money so that I can put 10% of that money in my treasure at home. Again I say, it's not important where you keep that money and with what interest if any. The idea is to develop a habit because we as humans are habit oriented. The strategy worked very well and my life didn't change a bit, I saw that everyone was right, my lifestyle didn't change at all, but there was a side effect. I wanted more. So I started saving more... I started saving 20% and 30% and you could say that that is not a biggie, after all there's more money in the piggy bank... Well the greed starts to come in and you want to save more and spend less. That thing alone can mess up your whole life. I learned this lesson fast and I'm glad. At one point I started to save 10% out of everything I spend, not out of everything I earn and that was also a good thing, but it makes things much more complicated than they need to be. My calculations were simple: If I save 10% out of everything I spend, if I have $1000 at the beginning of the month, and up till next month I spend $600, then I keep $60 plus the $340 that remain in my bank account anyway. This was futile and gave me so much to calculate and crunch every time I paid a dollar from my pocket. I started calculating every day how much money I spent that day and how much I needed to keep, and it happened that sometimes I didn't have enough money in my wallet to take out and put in the piggy bank, and I would leave that for the next day when I would go to the ATM to extract more and put it that evening in the piggy bank. This made my life so much complicated. Remember the point here is to develop a healthy habit and be paid while doing it and not to further complicate your life and for that sole purpose the 10% paid just when you receive the money, is the best strategy there is. After all, one should pay himself first and then the others. Some say that we should keep more than 10%, Robert Kiyosaki says we should keep 30%, 10% for savings, 10% for charity, and 10% for investments and he also emphasizes that the main idea is to get a good habit of paying ourselves first. Well this might be too much but for some people but also has the advantage to teach you that if you have enough to give away, then you have more than enough to live and that is a very good way of thinking. You might not have enough for everything you want to do, but you have enough to live and give away to your favorite charity, be it church or a hospital or anything else. Who knows, maybe you'll start a charity fund if you don't find one that you truly believe in. This amount of 30% might be too much at the beginning knowing that you already have other habits of spending your money month by month, but eventually you'll get to this amount or maybe more. Whatever amount you reach, I am strongly against saving more than 50% if it's a normal paycheck and not various passive incomes from various investments that you made over the time. An investment will only get you more money to save and to invest more, and by doing so you can take your cut and live off it, knowing that your cut will only get bigger with time and you'll only get more money while helping the world spin by doing smart investments. Savings are very important both for people and for businesses, a business can benefit widely especially in these times when the economy is heading for a serious slow down. Of course if everyone of us would save 10% or more day by day, the economy will suffer theoretically, but at the end of the day people will find themselves with more money at hand and being able to do more with the same money. One could buy more because he/she doesn't have to pay the bank with interest and actually use that interest. Also what happens when the unthinkable strikes? One could say that's what we have insurance for, and I agree, but you see insurance doesn't cover everything that could happen, and usually for the things that are riskier, insurance costs more. Financial education and knowledge are not easy to understand for the beginner, but as time passes and you evolve and learn more and apply what you learn you will see that this one pays and pays very well. Whatever you do, you must know that you should not break your lifestyle and concentrate more on making money rather than saving money, but still be able to pay yourself first and grow your treasure! Don't wait to save 10% when you'll make your million, start this healthy habit today!