A bit of an explanationI’m sure that many people on these boards have a good understanding why MAXAR has such a low share price and market capitalization, but, for anyone who hasn’t figured it out yet....here are a couple of things to be aware of (simplified a little to allow more people to understand)<br /> <br /> 1 Under normal circumstances, when you are looking at the market capitalization fo a company to see if is reasonable (based on some market cap vs sales volume or market cap vs profitability) you don’t worrry too much about debt or cash on hand. However, Sometimes it is important to take these things into account. In truth, when you say but the market cap is only XXX?”, you are assuming that the market cap is the only proper measure of the company’s value. However, let us imagine two companies, both with $100 million in non-cash assets, $100 million in sales, $10 million in profit and are growing profit at 10% per year. Let’s say that Company A has net debts (cash minus debts) of $100M and Company B has $100M of cash on hand and no debt. Are they both worth the same amount of money? Obviously not. Most professionals would realise that, if you could buy company A for $100 million you would actually be getting it for free...since, when you have bought it, you could pocket the $100 million they have in the bank. However, if you paid $100 million for company B, you would still owe the banks $100 million. The way to resolve this connundrum is to DEDUCT the net cash or ADD the net debt position from the money you pay to figure out what you are really paying for the company. In the case of Company A it is zero. In the case of Company B, it is $200 million. The technical term for this number is the Enterprise Value. If you are going to buy a company (or the shares in a company) you really should know what the real purchase price (or Enterprise Value) would be if you were going to buy it and figure out if that still makes sense. In the case of Maxar, they have a very low share price (and book value), but they have lots of debt, so, in reality, when you buy the shares, you are taking on board that debt too. Maybe those shares aren’t so valuable after all.
In rough terms, if MAXAR has a market cap of $300M and net debt of $3B, the shareholders have valued the activities and other assests within the company at $3.3B, but discounted it down to $300M because of the net debt (and their assessment of risk)
It takes a fair amount of time to understand how this really works and you need to do your own due diligence to see what makes sense for you. Bear in mind that the value of the company (whether you use Market Cap or Enterprise Value) is only one small part of the equation. There are lots of other things to figure out as well.
2 In order to get a glimpse (even if a potentially biased one) about some of these things, you might want to read Spruce Point Capital Management’s report on Maxar. They are currently shorting Maxar big time and have a vested interest in seeing the share price go down, but they have carried out a very extensive review of the financials and the forward looking position of the company. You may not agree with all of their findings and think that they are exaggerating, but they are worth a read, so at least you know the risks you are taking if you choose to invest in Maxar. More importantly, it’ll give you a clue about how complex it really is to fully understand a large, diverse, complex company. If it is your hard earned money at play, you owe it to yourself to discover as much as you can so that you can make informed jusdgements. Many of the issues raised by Spruce Point are useful in judging not only Maxar, but other companies tat you might be looking at in the future.
This has been pretty long winded, but I hope it is of value to at least some of you.
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