The formula for Enterprise Value that I often see is:
EV = Total Debt + Market Cap - Cash
Often "Cash" is refined further as "Excess Cash" in this formula. My question is how can I determine the amount of excess cash a company has from it's balance sheet?
Is it as simple as subtracting Current Liabilities from Total Cash, since it would be advisable for a company to keep enough cash on hand to meet these types of liabilities, and therefore this portion would not be considered excess?
Then we'd have:
Excess Cash = Cash & Equivalents + Long-Term Investments - Current Liabilities
In Apple's case, this results in $49B of excess cash. I've also seen people use the general rule that any cash exceeding 20% of revenue is "excess".
What is the proper way to do this, in general, or pros/cons of different approaches? Am I missing something?