
Which company is the biggest? A primer on corporate valuation - sinzone
http://arstechnica.com/apple/guides/2011/02/does-this-metric-make-my-company-look-big.ars
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brc
A good way to think about market cap, is if a company had 100 equal shares,
and those 100 shareholders stood in a room. Then if 2 of them traded shares
and told everyone what the value of the company was, and the other 98 didn't
say anything, so the statement of the 2 goes down on record. That's market
cap. It's the instant opinion of a minority of shareholders as to the going
value based on the trading value of a small percentage of shares. In other
words, it means absolutely nothing.

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harryh
That's bullshit. If a seller finds a buyer on an open market you've, more or
less, found a value for the good. If it was too out of wack (either on the
high or the low side) the other 98 people in the room wouldn't have stood pat.
2% of a company changing positions in a single day is a very high number.

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brc
Have to disagree strongly. A seller and a buyer have found a value for the
individual share (or package of shares). The value of the company is not the
multiple of shares x price paid, because not every share in the company is
going to trade at that value. There will be a marginal change in price for
each additional share sold. The other 98 people in the room may have other
reasons for not buying or selling. They may agree with the price, they may
not. They may think the price is going higher, they may not be even listening
to the prices.

Think of it like inventory. If you have 100 cars in a lot, and you sell the
first for 10,000. Is the stock worth $1m? For accounting purposes, yes. Are
you going to get $1m if you sell all the cars - no, you're not. Either of two
things is going to happen - only 50 people want the cars and you have to start
discounting to move the rest, or, once alerted to the sale of the cars, 200
buyers turn up and the price goes higher. So the total value of the cars isn't
really $1m, apart from on an accounting sheet. Same as market cap.

The other 98 people in the room haven't assigned a value to the item. You've
only found a market for 2% of a company. The other 98 people may sell at a
higher or lower amount, but for each one that did, there has to be a supply of
buyers at that level.

Summarized : market cap is the total value as derived from the current
opinions of the people trading shares. It's not the same as total market
value, because you could never buy the entire company for that amount.

Yes, I know 2% turnover is a high value, chosen to make it a simple example.

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dereg
Your assumption is that market cap dramatically overstates the market value of
companies. Your car analogy is flawed.

Why not look at mergers and acquisitions? When companies attempt hostile
takeovers, are they making bids that undercut the market's own valuations? Do
people like to sell their shares at large discounts? No. Companies have to pay
a hefty price premium over the existing market value.

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brc
No, if you re-read it, I implied that the market cap could be lower or higher.
The car example said that either you have more buyers than you need, or less
buyers than you need. You would end up with less than, or more than $1 million
dollars, but it's unlikely you'd end up with exactly that amount.

Indeed an open-market acquisition is a good indicator of the value of the
company - the value of anything being what someone is willing to pay for it.

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mkinnan
Wow! This article certainly gives you a different perspective on how companies
like Google, Apple, and Microsoft really are small as compared to giants like
GE, Exxon, etc.

What blows me away is that Wal-Mart has 2 million+ employees! A piece of
information that would be interesting as a comparison is the number of
government employees there are in different countries ...

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thematt
To put that in perspective even further, that means Wal-Mart constitutes about
1% of the American workforce.

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MikeCapone
And this doesn't count some of Walmart's main suppliers/logistics providers,
like McLane (which is part of Berkshire Hathaway).

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jacques_chester
How cash balances are measured is a matter for considerable debate.

In general, it's important to distinguish cash balance and flows from
_investments_ vs _operations_.

Banks often report their vast cash balance under _operations_ , as holding and
lending cash is their core business, not something they do on the side.

Accountants like to project this aura that they're perfectly predictable
categorisers of financial truth, but it's bunk. When you can change a
company's reported cash balance by _billions of dollars_ through a clever
argument, you're well and truly into the land of politics.

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marvin
I'd argue that this is simply a matter of the nature of money and investments.
When you're a regular Joe cashing a paycheck, the numbers on your bank account
seem like absolutes. But on the scales that large companies operate, things
are a lot more fluid. For instance, banks don't have direct access to all the
money their account holders have deposited, the exact value of a large
investment is subject to all sorts of market conditions, inflation and
currency fluctuations changes the actual value of things over time etc. Even
if you look at the economy of a single person, this phenomenon becomes
apparent.

Remember that "reported cash balance" is just a number. The actual assets
backing that number can always be tracked down somewhere.

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jacques_chester
This is all true, but I was referring to the financial accounting distinction
between cash flow from _operating_ , _investing_ and _financing_ activities.

Some banks count the influx as gains from financing, others as from
operations.

In both cases the cash balance is _not an asset_ , it's a liability because
the bank can be called on to produce the money at any time.

