Microsoft's ( MSFT) bold plan to pay out a whopping $32 billion special dividend has put the spotlight on tech companies burdened with the "problem" of too much cash.
This issue, which is besetting an elite cadre of companies that include larger-caps such as Apple Computer ( APPL), Cisco Systems ( CSCO) and Symantec ( SYMC) as well as smaller-caps such as NetIQ ( NTIQ) and SupportSoft ( SPRT), has left investors grappling with how to value excess cash.
The question: Should investors subtract out cash from the price of a stock when computing a price-to-earnings valuation?
The answer, unfortunately, isn't straightforward. While the practice of subtracting out cash to value a stock appears to be growing, some investors say it has its shortcomings.
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However, several analysts and investors say it makes sense to use enterprise value to come up with a stock multiple. Enterprise value looks at the worth of a company the way an acquirer would -- taking into account a company's cash and debt. The figure is calculated by taking the market cap and then subtracting cash and adding debt. Most software companies don't carry debt, so calculating enterprise value typically involves only subtracting cash.
|A Makeover for Cash-Flush Companies |
A stock's valuation often looks better when cash is subtracted out
|Stock||Forward P/E||Enterprise Value/EBITDA|
|Source: Reuters via Yahoo!Finance |
*Enterprise Value for Microsoft does not account for the company's special one-time dividend.