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Denis Ouellet, CFA

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  • Apple's P/E Calculation: Subtract The Cash? [View article]
    If you subtract the cash from the stock price, you also have to subtract the income from that cash from the EPS. With interest rates so low, this is a mute point since net after tax income on $81 of cash is max $0.40, only 1.5% of total EPS.

    It means that if Apple tomorrow distributed all its cash to shareholders, its EPS would only decline to $24.87. If cash has no real impact on the PE, the stock price would decline to $373 (15.0x $24.87) but shareholders would also receive $81.21 in cash for total value of $454.26, which is $74.26 higher than the current stock price.

    Apple’s EV/EBITDA of 8.4x = $297 + cash received of $81.21 = $378.74 (rounding errors).

    The reason that cash is so valuable today is that interest rates are so low, almost nil. Effectively, the cash has little impact on EPS. If you do not take it into account, you reduce the true value of the stock by nearly the amount of the cash.

    EV/EBITDA is useful when interest rates are higher and have a greater impact on earnings and cash flows. The concept effectively “neutralizes” the impact of net debt and taxation on valuation.
    Aug 17 12:42 PM | 1 Like Like |Link to Comment
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