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My question is general, but prompted by the current stock price of NASDAQ:CRTO (https://www.google.com/search?q=crto&tbm=fin). The company is currently trading at a market cap of less than 400M$ current value but the last earnings report shows 418.76M$ "cash on hand".enter image description here

Does it mean that anyone buying the company would make instant profit ? What sense does it even make to be valued below the cash you're sitting on ?

This is not even regarding the fact that the company is also generating money through its activity, and all the material assets they possess like servers & stuff.


Edit : the company has virtually no debt.

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    Assuming the number of outstanding shares is fixed, market capitalization is just a function of the last transaction price, not a fundamental measure of the company's assets or liabilities. There are many factors that affect the last transaction price, not all of them rational. – chepner Mar 18 at 16:04
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    Market cap is purely based off the buy and selling of shares. It is not based off financial data of the company. Market cap is all specific to a particular exchange, so a company can have different market caps if it is cross-listed on multiple exchanges. (Usually the primary exchange valuation is used) – Gregory Currie Mar 19 at 2:40
  • Your question might be more clearly phrased in terms of book value. – chrylis -cautiouslyoptimistic- Mar 19 at 2:59
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    What makes you think the company has close to no debt? Per the link posted in a comment below, it has $700M of debt. – Grade 'Eh' Bacon Mar 19 at 14:16
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There are several similar answers, but I feel a need to clarify how stock prices really work.

The original post is about Point 3 below -- someone taking Control of the Company and divesting its assets.

The stock price shown on exchange as current is actually two prices: how much someone is prepared to pay for a "small" number of stocks, and how much someone is willing to sell a "small" number of stocks. The part of "small" is relevant for Point 3 below.

The buyer of a stock is willing to pay for one, two or three things:

  1. Future dividends (guessing how much the Company will pay in dividends)
  2. Future change in the stock value (guessing how much other buyers are willing to pay for the stock)
  3. Control of the Company (often requires buying a lot of shares, hence in getting control there is generally a premium paid above current share price).

Point 3 might be because you want to do a merger, or simply divest the companies assets, or any other reason. Control requires a large part, often at least 50%, of the votes for the shares (note that in some countries different types of shares can have different voting rights). There are in many markets a minority shareholder protection, say if other shareholders has above 10% to complicate matters a bit more.

(Of course, for an individual sale there can be further reasons. Not unusual is to realize a profit / loss in order to influence taxes).

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I'm not sure why you say, "the company has virtually no debt". Their balance sheet says otherwise.

CRTO has about $390 million in accounts payable. Their total liabilities are approximately $750 million. So they may have lots of cash, but they owe even more money than that. Shareholders can't take the company's cash without paying off the company's debts.

The company currently has about $1 billion in assets (and that includes around $400 million in assets that you can't sell such as goodwill) and $1.8 billion in debt. So it's in the red by $0.8 billion to $1.2 billion. The company only has a positive value because people believe its condition will improve. This isn't an unreasonable expectation as they have solid revenue.

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  • Does the amount of debt have any impact on market cap calculation? – Gregory Currie Mar 19 at 2:42
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    @GregoryCurrie Directly? No, there is no direct connection between what a company is worth according to its balance sheet and what it is worth according to its market capitalization on the stock exchange. Indirectly by affecting investor psychology? Perhaps. – Philipp Mar 19 at 13:33
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    @Philipp, to me that's the real answer. The stock market is just a perceived valuation. It is simply correlated with assets, cash, debt, etc. Educated or ignorant speculation is, to some degree or other, part of the equation. – Tracy Cramer Mar 19 at 19:23
  • @TracyCramer Right now, there are funds that hold only short-term, ultra-safe investments whose market cap is significantly below their NAV. That only makes sense when you realize that speculation, perception, what other things people can do with their money, and the like are significant price-affecting factors. – David Schwartz Mar 19 at 19:29
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    @Philipp You are implying that there is zero connection to the fundamentals of the business and its share price. Yes, lots of debt of course has an impact on market capitalization. – Grade 'Eh' Bacon Mar 19 at 20:20
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Even a company with $100M in cash isn't worth that much if, for example, it has $60M in debt. Equity holders only get paid after debtholders get paid. That's why equity has a higher risk and a higher return than debtholders.

If the company you're looking at has any debt at all, that would reduce the value of their equity trading on the stock market. Whether that is the only thing going on, I don't know.

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    Wouldn't this be reflected in the financial results ? Maybe I'm wrong in my understanding that "cash on hand" is the net value, but I see no mention of debts in the summary... – Zonko Mar 18 at 14:53
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    @Zonko 'Cash on hand' is the literal cash in the bank. Just like you can have $5k in your savings account and a $200k mortgage, a company can have $100M cash on hand but $1B in debt. I am not sure what summary you are looking at, but there could be other things going on. This would be a common example. – Grade 'Eh' Bacon Mar 18 at 14:55
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    @Zonko you can see the balance sheet here: finance.yahoo.com/quote/CRTO/balance-sheet?p=CRTO Total assets: 1.79B Total liabilities: 752M. Interestingly the difference is still greater than the market cap. Its possible some of the "non-current" or intangible assets are being priced by the market as uncollectable/not correctly valued... – mbrig Mar 19 at 1:34
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    @Zonko The financial results only tell you what had already happened. Looking at the company's own future forecasts, and the increasing regulation in its industry sector, might explain why after trading at around $20 for most of a year (with a short blip up to $27) the share price has steadily dropped to around $7 over the last few months. – alephzero Mar 19 at 1:47
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    A company I'm invested in is currently trading at 0.7 of book, and unless I'm much more of an idiot than I realize it's simply because of mass panic and reflexive sell-offs. I'm buying. – chrylis -cautiouslyoptimistic- Mar 19 at 3:00
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Even assuming they have no debt, if revenue dries up they could quickly burn through that pile of cash. The stock may be currently undervalued, but the price reflects the uncertainty of their ability to use that cash and other assets to churn out profits in the future.

If they had no debt and were liquidated today then you could definitively say they are undervalued.

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    not to mention the cash on hand is as of the last quarterly report - who knows what has happened since then? – Michael Mar 19 at 0:07
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Market capitalization is a completely theoretical value that is based on how much investors are willing to pay for the stock, which in turn in based on investor expectations for the future of the company. It has nothing to with the actual balance sheet of the company.

Let's look at a simpler example:

  • Company X has an initial public offer that raises $100M.
  • They use $90M of the money raised to purchase equipment.
  • The company earns $7M of profit.
  • The value of the equipment has depreciated to $60M.
  • Investors are enthusiastic about the company, raising the stock price by 50%.

So what is the value of the company now?

  • The market capitalization is now 100 x 1.50 = $150M.
  • The company has 100 - 90 + 7 = $17M cash on hand. Note how this is less than the market capitalization.
  • The total assets of the company are 17 + 60 = $77M. This is also less than the market capitalization.

And yet, the company is successful and liquid. Market capitalization has nothing to do with the company's balance sheet.

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    +1 for being the only answer that addresses the difference between market cap and book value – Gregory Currie Mar 19 at 2:31
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There are many reasons that the shareholder decide to sell a stock during the bear. It is mostly due to opportunity cost justification, i.e.

  • Company never pays dividends
  • Low rebound potential
  • Company dilluting per stock value
  • Poor future earning prospect
  • there are better company to invest the same dollar

No, you cannot make "instant profit" after you purchase the stock. Public stock only pay out the profit/cash via dividends payout. Since the company never have a dividends payment record, you will not make any profit if you holding the stock. Unless you are able to sell the share in higher price later.

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    i think by instant profit they meant if somebody bought the whole company – Michael Mar 19 at 0:09
  • @Michael only if the sombody issues dividends or use the money to make share buyback to push up the share price. – mootmoot Mar 19 at 9:36
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    If you buy then entire company you basically own the whole thing and can do whatever you like with it. Actually accomplishing that of course is a different matter. – Michael Mar 19 at 18:41
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Suppose my company has a billion dollars in cash and no debt. Now suppose I expect to lose 2 billion dollars on my trading in the next year, and it's unlikely that anyone will lend to me to cover the shortfall. I'm likely to go bankrupt, and my stock is close to worthless. That is, it will be worth much less than the cash on hand. It's worthless now because analysts can see the problems.

Obviously on the contrary if I have a billion dollars in cash and expect to make two billion dollars from it for every year for the foreseeable future then the stock is going to be quite highly valued.

So stock value is only tangentially related to the current cash, debt etc. (the balance sheet). It's primarily based on expectations of future cashflow.

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