Value Investing

How To Find Deep Value Negative Enterprise Value Companies

How To Find Deep Value Negative Enterprise Value Companies by Tim du Toit, Quant Investing

How can I find negative enterprise value companies is a question we have received from a few deep value investors, so here is a short article to show you exactly how.

Why negative enterprise value companies?

Why look for negative enterprise value companies you may be thinking.

A negative enterprise value company is usually very undervalued with a lot of cash on its balance sheet, thus they are really interesting to deep value investors.

More cash than market value and debt

For a company to have a negative enterprise value it has to have more cash on its balance sheet than its market value and debt (exact formulas are shown below).

This means there is a high probability that the company is very undervalued and worth taking a look at, especially if you are a deep value investor.

How you can find negative enterprise value companies?

The screener makes it very easy to find negative enterprise value companies as we have already saved a screen you can load with only a few mouse clicks.

Once you have logged in and opened the screener Click on My templates then on Load a template.

Negative Enterprise Value

Then click on Predefined templates and then the number 2 to go to the second page of saved screens.

Negative Enterprise Value

Then click on the name Negative Enterprise Value Stock Screen to select it.

Negative Enterprise Value

To open the screen scroll down and click on the Load button

Negative Enterprise Value

When you load the screen you will see that the screener uses the Enterprise Value column to search for companies with an Enterprise Value less than 0.

Negative Enterprise Value

Your negative enterprise value screen

There you have it, your list of negative enterprise value companies after just six mouse clicks.

Refine your settings

You can further refine the results with the following settings:

  • Include only the countries where you invest
  • Increase the quality of the companies with the Piotroski F-Score (>5 for example)
  • Include only liquid companies by specifying Daily Trading Volume or Market Value minimum.

How is it calculated?

In the screener Enterprise value is calculated as = the current market value of the company (market capitalisation) + Long-Term Debt + Minority Interest + Preferred capital – Excess Cash.

Excess cash is the amount of cash in excess of what the company needs to run its business, in other words cash that can be paid out to investors without harming the business.

Excess cash is calculated as follows:

If Total Current Assets are greater than (2 x Total Current Liabilities), then Excess Cash is the lower of:

  • Cash and Short Term Investments or
  • Total Current Assets – (2 * Total Current Liabilities).

If Current Assets are not greater than (2 x Total Current Liabilities) then Excess cash is 0.

An example

Let us assume a company’s Current Assets minus two times its Current Liabilities are €1000 and its Cash and Short Term investments equal €500.

You can see it has excess cash because Current assets are larger than two times current liabilities.

Excess cash is thus €500, the lower of €1000 and €500.

Where does this excess cash formula come from?

Joel Greenblatt on his Magic Formula Investing website said only excess must be deducted in the Enterprise Value formula.

This makes sense as I am sure you will agree that a business cannot pay out all the cash on its balance sheet but only the amount more than it needs to run its business.

Unfortunately Joel does not mention how he calculates excess cash.

We went back to Benjamin Graham

We thus decided to use one of Benjamin Graham’s margin of safety rule he wrote about in his book The Intelligent Investor which says:

“Invest only in companies where the current ratio (Current assets / Current Liabilities) is more than 1.5.”

We increased this ratio to two before assuming a company has excess cash on its balance sheet. So as you can see a very conservative calculation.

Your negative enterprise value analyst

Tim du Toit

PS To find negative enterprise value companies for your portfolio sign up here: Negative enterprise value screener.