The Daily Technical #10

Good morning. Phew, we’re in the double digits! Welcome to the tenth edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
What is equity value and how is it calculated?

Start with a definition. Equity value is often called market capitalization and represents the value of a company that belongs to its shareholders. It’s basically what they're collectively worth if shares were sold at the current market price.

After getting the definition out of the way, break down the formula: Equity Value = Latest Closing Share Price × Total Diluted Shares Outstanding.

Why this formula? The latest closing share price represents the most current valuation by the market, and the total diluted shares outstanding account for all shares that could be claimed by shareholders, factoring in stock options, convertible securities, etc.

For example, a company’s closing share price is $50 and it has 10 million diluted shares outstanding, then the equity value is $50 × 10 million = $500 million. Simple, right?

Lastly, here’s why it's important. Investors and analysts use equity value to gauge a company’s relative size and to perform valuations and comparisons.

Common Mistakes

1. Confusing Equity Value with Enterprise Value: Enterprise value includes more than just equity (like debt and cash), while equity value focuses only on the shareholders’ piece of the pie.

2. Forgetting Dilution: Using just the basic shares outstanding can lead to undervaluing the company. Dilution accounts for shares that could be exercised and convert into common stock.

3. Ignoring Market Dynamics: Always ensure you're using the most recent closing price to reflect the current market valuation accurately.

Key Takeaways / TLDR

• It’s the market capitalization and measures a company’s value to its equity shareholders.

• Equity Value = Latest Closing Share Price × Total Diluted Shares Outstanding.

• Use the latest market data and account for potential dilution to get accurate figures.

TODAY’S QUESTION
Intuitively, what does the P/E ratio mean?

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