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by adventured
4223 days ago
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That's not true. A company taking on more debt does not automatically alter its market cap. There is no automatic correlation for any given valuation metric, whether we're talking about how high a PE ratio should be, or how debt should be valued when deciding if a market cap is reasonable. Your 1) item rests on the efficient market theory, which is false. It is entirely up to investors - their reasoning and emotion - and it typically varies significantly from one industry to another, and from one company to another. For some companies, taking on debt will not alter the market cap what-so-ever. Apple for example, viewed as an extremely healthy company with massive earnings, can take on debt without it denting their market cap in a negative way. |
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Here's the point I'm making...
Let's take an oversimplified view of the world. 1) In 2008 a company has $1 billion in stock value, no debt and goes belly up. 2) In 2009 a new company starts with $2 billion in debt financing, and $100 million in equity financing.
According to a "Total stock market cap" there is a drop. But that drop doesn't mean anything. A larger company was created in it's place. It just gets missed because of the debt financing.
Similar things happen within a company. If a $1 billion company goes private in a leveraged buyout, there will be $1 billion less on the public equity side (in the total stock market capitalization) but you're not measuring the increase in privately held equity or debt side. The total value of equity may also change if companies issue or pay back debt, or issue or buy back equity.
The main point I'm arguing is that total capitalization of stock only doesn't tell you much, for the same reason that only looking at equity on a company's balance sheet is an incomplete picture.