The 100 cheapest shares on the ASX

Last week I wrote an article called the 20 cheapest blue chip shares on the ASX using a valuation metric called Price-to-Book. This week I've ranked the top 100 ASX stocks using another one of my favourite metrics called the Enterprise Value (EV). I have then compared it to the company's market capital.

The EV to market capital ratio helps value investors to identify undervalued companies. It heavily favours companies with lots of cash and little or no debt, which are the type of companies I like to invest in.

What is Enterprise Value?

Think of enterprise value as the theoretical takeover price. In the event of a buyout, an acquirer would have to take on the company's debt, but would pocket its cash.

EV differs significantly from simple market capitalisation in several ways, and many consider it to be a more accurate representation of a firm's value.

The value of a firm's debt, for example, would need to be paid by the buyer when taking over a company, thus EV provides a much more accurate takeover valuation because it includes debt in its value calculation.

How to calculate Enterprise Value correctly

In its simplest form, Enterprise Value (EV) is calculated as the market cap plus debt and minority interest and preferred shares, minus total cash and cash equivalents.

As an example let's take a look at Worleyparsons Limited (ASX: WOR).

First, we start with the Market Capitalisation (M/C), which we can find at a number of sites, like Google Finance. As you can see its M/C is $1.3 Billion:

Next, we need to add short-term and long-term debt to the market cap, which you can find on the company's balance sheet. As you can see, Worleyparsons has $25.5 million in short-term debt and $1,210.4 million in long-term debt. That means total debt is $1.23 billion:

Worleyparsons has no minority interests or preferred shares so, all we have to do now is subtract any cash and cash equivalents. This figure can also be found on the balance sheet. As you can see Worleyparsons has $381.9 million in cash and cash equivalents:

Now we have everything we need to calculate the EV.

Market Cap is $1.3 billion
plus
Short term and long-term debt is $1.235 billion
plus
Minority interests is $0
plus
Preferred shares is $0
minus
Cash and cash equivalents are $381.9 Million

This gives us a total Enterprise Value of $2.15 Billion.

In other words, assuming I could buy all the shares in the whole company, I could buy Worleyparsons for $1.3 billion but, when I take into consideration its balance sheet, as an 'acquirer' it's actually costing me $2.15 billion.

How do the top 100 ASX stocks rank for the EV/market cap ratio?

So, here's my ranking of the top 100 ASX companies by market capitalisation and EV. The table shows the companies with the greatest discount to their current market value when you consider their EV. Companies are listed in 'discount' order, highest to lowest.

I've excluded financials, utilities, and A-REITs because of the nature of their balance sheets from an EV point of view. I've also excluded a couple of recently-listed companies that had insufficient data.

Market Capitalisation – Share Price * Number of Outstanding Shares (expressed in $billions)
Enterprise Value – Market cap plus debt and minority interest and preferred shares, minus total cash and cash equivalents (expressed in $billions)
Discount – The discount between M/C and EV (expressed in $billions)
% of M/C – The discount as a percentage of market cap (expressed as a percentage)