Winning The Mixed Doubles

As the number of double-income families is increasing, so is the awareness of personal finance issues. It’s not just about having a joint bank account anymore. Mumbai-based couple Sebanti, 38, and Prithwijit Maitra, 41, feel that planning their financial tomorrow together plays a major role in strengthening their relationship which began 15 years ago. But more important is their decision to not leave out each other from the planning process. Be it saving for the education and marriage expenses of their two daughters or making a strategy to become salary-free by the time they retire, they plan together.

Homemaker Dolon Champa Sircar, 36, and Niloy Sircar, 43, who is a project manager living in Kolkata, also want to make the journey to a secure financial future together. For many, planning finances and goals with their spouse is one of the ‘don’ts’ picked up from parents and grandparents. But then there are others who make an extra effort to manage their money together because they understand the benefits of doing so.

Joint decision making apart, it is also critical to share financial information with the spouse. Kartik Varma, co-founder, iTrust Financial Advisors, says, “In the coming decade, many more households will start focusing on articulating their [financial] goals and discussing them openly within the family.” Understanding why this is important and what to do to make this work will help make your family’s future hassle-free.

Why plan together?

Being prepared for potential emergencies. In case of an unfortunate event such as death of one spouse, the surviving spouse would suffer if he/she has no knowledge of the family’s finances and asset status. Similarly, if there is a medical emergency, the couple needs to know about each other’s health covers and should have access to emergency funds.

Chennai-based lawyer K.V. Subha mentions the case of Shankari (name changed) from the same city, who lost her husband in an accident, to show why this is important. Shankari was not aware of her husband’s investments and had to ­arrange Rs 12 lakh for his emergency hospitalisation expenses before his demise. She mortgaged the house and her jewels to pay for the bills. Later, while going through her husband’s personal belongings, Shankari found a health insurance policy, which should have been renewed a month before the incident.

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Priya 37 & Bala Venkat 41 Chennai
The Venkat couple shares their money responsibilities. Priya manages daily expenses and their investment portfolio.
"But we know what is happening in each other’s world. He tells me where he has invested and how much."
***

Lovaii Navlakhi, managing director and chief financial planner, International Money Matters, Bangalore, recalls another case in which a retired client had filed and documented all his papers diligently and taken good care of his cash flow as well. But, he had not involved his wife in the money management. She had difficulty taking over the responsibility after he died suddenly.

Reasons enough to make sure your spouse knows the what, when and how of your investments (see Ready Reckoner).

Two heads are better than one. Taking joint decisions helps not just in emergencies, but also in better understanding the family’s needs and getting a firm hold on financial goals. In the process, the couple also gets a holistic view of the family’s finances, from day-to-day needs to long-term goals. Pointing the need to think ahead, Dolon says, “Our joint discussions help us understand whether we can sustain the outflow towards investments.”

A joint venture ensures that investments are not overweight on one spouse. Systematically made joint plans also help in fair distribution of wealth among family members.

If a couple applies for a home loan jointly, they become eligible for a bigger loan. Not to forget the tax advantages here. Says Navlakhi, “If a property is held jointly and the home loan is also taken jointly, for example, then both spouses can claim interest deduction.”

If holding investments jointly, opt for the ‘either or survivor’ option in the application forms as this helps if either spouse is not around. With this option, any spouse can transact on that account without having to get signatures of all the account holders.

“Power of attorney can also be given so that investments can be managed smoothly,” says Navlakhi.

Playing a mixed-doubles game can also be a great way to save on time, especially for working couples. Says Sebanti: “Due to my husband’s time constraints, sometimes I do the initial research on various investment products. But the final decision of where to invest is taken jointly.”

You could also use the services of a financial planner to make things easier.

How to play the team game

1. Discuss financial goals at regular intervals. A couple needs to jointly give direction to their family’s financial goals, whether it is saving for their children’s education or marriage, taking care of parents or their own retirement plans. Varma says, “Discussions need to happen frequently, at least once a year. It helps to keep the goals in focus and move towards them by planning expenses accordingly.”

The Maitras review their investment plans every three months. Says Sebanti: “This helps us decide whether we need to step up savings and how much to put aside for our future requirements. We are constantly looking at various investment options that will help us maintain our current lifestyle at the time of retirement after factoring in inflation.”

Bangalore-based couple of Deepti, 25, and Sandeep Balani, 30, revisit their investment goals at least once in six months. “This helps us invest in any new schemes or options that come up in the market,” says Sandeep.

2. Share money responsibilities. Many couples divide money roles among themselves, as do Chennai-based Priya, 37, and Bala Venkat, 41. While Priya takes care of the daily planning, Venkat handles the investment portfolios. “But we know what is happening in each other’s world. He gives me an idea of where he has invested and how much,” says Priya.

3. Understand the money flow. Discuss your family budget so both know where the money is coming from and where it is going. This is critical to keep all goals, however distant they might be in the future, in sight. Doing this can go a long way in regulating the money flow towards different directions. For example, retirement planning should not get ignored in favour of children’s education, nor should holidays gobble up money that could have gone towards funding your children’s higher education.

4. Know your existing investments. The couple needs to know where the money has been invested and have a fair idea about existing assets and liabilities.
Make a Will and keep updating it. If you do not have a Will, make one at the earliest, especially if you are married. Doing this makes any kind of transfer of assets clear and trouble-free. Otherwise, the process can consume a lot of time, effort and money. Nikunj Kedia, director, PARK Financial Advisors, says, “It is important that the family members know the details of the attorney who is executing the Will. Specific details of the Will need not be disclosed if not required.”

Another simple step is to nominate beneficiaries in all investments. For instance, most of the Sircar couple’s investments are in joint names with their daughter as the nominee.

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Dolon Champa 36 & Niloy Sircar 43 KolkKata
The Sircars regularly talk about their money matters to get an overall view of their finances, be it day-to-day expenses or long-term investments.
“Our joint discussions help us understand whether we can sustain the regular outflow toward investment."
***

5. Audit your documents regularly. Regularly review the list of all investments, including insurance policies, bank accounts, bank lockers, demat accounts, fixed accounts, provident fund accounts and property papers, and make updates. List the details of the liabilities and assets. Review loan documents, whether personal, car or home, and other forms of repayments. You could also list out details of major outflows like your children’s education. Priya says, “We go through our paper work every six months to make sure that everything is in order and follow up on premiums that need to be paid.”

Such an exercise is also a method of reducing redundancies like inoperative bank accounts that need to be closed. You can also review your current investment products, deploy underperforming investments elsewhere and buy any new products that come in the market.

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Sebanti 38 & Prithwijit Maitra 41 Mumbai
The Maitras not only plan their investments together and share the related work, but also review them every three months.
"This helps us take a decision on whether we need to step up savings and how much to put aside for our future requirements."
***

6. Know where the documents are kept. An insurance policy or investment has no meaning if your family cannot access it at the time of need (see Documents To Keep). Ensure that your spouse knows where all the important documents are kept. You can create an online or a physical document that has the essential details of insurance policies and other investments. It should also mention where these documents are kept. Add contact details of the financial advisor or chartered accountant who may be handling your transactions. This document must be easily accessible. The actual documents can be stashed away in a safe, if needed. You can also store scanned copies of important documents on your computer. This makes for additional flexibility and ease of access.

Sandeep, for example, keeps his investment and insurance papers and also print-outs of online documents in a single file. “I make two photocopies. Deepti keeps one copy and my parents the other. The two copies are necessarily at different locations,” he says. Sandeep keeps this information with himself also.

Online tracking of investment portfolios is another option. Says Kedia: “There are websites that let you maintain a comprehensive view of your entire portfolio. Details of insurance policies can also be updated on these websites. Passwords of such sites should be documented in a secure manner and kept separately, and should be accessible.”

7. Disclose all important and material facts. Seems obvious, but doesn’t happen always. Be it income details, investments, signatures made on important documents, ancestral property or any kind of financial transaction, it should be with the consent or knowledge of your spouse. A spouse may suffer if he/she is not aware of any deal.

Making your life partner a partner in your money life doesn’t take much, but its benefits are many and long-lasting.

Source - OutlookMoney

Ease of settlement

Life insurance policy is a legal contract between the insurance company and the insured, where the former agrees to pay a pre-defined sum to the nominee on the death of the insured. However, making a claim on a life cover is not necessarily the happiest of tasks, and for women, it's especially daunting. Even for a survival claim, particularly on moneyback policies, though the amount reaches the beneficiary automatically, at times the procedure is cumbersome because of the documentation required.

Women often face problems in a survival claim because they tend to change their names after marriage but fail to inform the insurer. So the benefits dispatched by the insurance company are not cleared by banks because the policy document is still in the maiden name. Subsequently, the policyholder is required to make a fresh claim and provide the requisite documents.

In case of the death of the insured, a basic procedure needs to be followed to make a claim and get the proceeds. As a first step, the nominee needs to submit a claim form, which varies across insurers. The form must be complete and the details demanded must be provided. The nominee also needs to submit the original policy document, attested copies of the death certificate, and if it is a medical or legal case, the requisite medical and policy reports. The nominee also has to furnish the proof of his own identity before the claim can be settled.

Unlike policy servicing, which is handled by agents, claims are settled directly by the insurance company once it finds the documentation satisfactory. So women should be wary of any person who tries to facilitate or help in the claims process.

After the necessary forms and documents are submitted, the insurer takes between 10 days and two weeks to verify them and can ask for more documentation, if needed. The Insurance Regulatory and Development Authority (Irda) has stipulated that claims be settled within 30 days of the receipt of the relevant documents. However, the insurer can ask for clarifications or supporting documents if the submitted documents are not satisfactory. For instance, in case of death due to medical reasons, the insurer can seek details on the insured's health and past medical history.

Even in cases where the insurer seeks additional details, the claim has to be settled within six months from the date of intimation of the claim. If the insurer fails to meet the deadline, he has to pay an interest on the sum assured. The nominee can also approach the ombudsman if the insurer fails to pay the claim on time.

Documents needed for a quick and error-free settlement of claim, the nominee needs to submit the following papers to the insurance company:

1. Policy document
2. A copy of death certificate.
3. A copy of photo identify proof of the claimant such as the passport, PAN card, election card or the driving licence.
4. A copy of proof of current residence in the name of the claimant such as the electricity bill, telephone bill, ration card, passport or election card.
5. A filled claim form, along with bank account details.
6. Insurers can demand more documentation if the death is after a prolonged illness and hospitalisation or required police intervention.

Source - MoneyToday

A Better Alternative?

No exams or competition. Just the freedom to expand his horizons. Non-traditional education may be just right for your child in his formative years

What To Do

• Verify the reputation of the school before admitting your child
• Support the child during his transition from alternative school to mainstream education
• Support him in pursuing his own interests
• If medicine or engineering is the goal, shift to a CBSE or ICSE school

Do you want your child to go through the same system of education that you did? Is it that you don’t quite agree with it, but don’t know whether there are other options available? Iif you are, then there are a number of options you can look at. For today, a number of non-traditional or alternative routes are available to your child. These include alternative schools and home-based learning. Here we concentrate on alternative schools. In India, some schools follow systems based on the Waldorf philosophy (of Rudolf Steiner) or on the teachings of Sri Aurobindo or J. Kishnamurthy.

Difference
"Alternative education is more child-centric, while the traditional system follows a more top-down approach,” says Pervin Malhotra, executive director, CareerGuidanceIndia, a career counselling firm.

Mainstream education focuses on completion of a fixed syllabus, exams, grading and promoting the child. In alternative education, children are given the freedom, space and time to explore topics of their interest. “It is not evaluation by comparing one human being with another, but objective assessment of the capacity of each child,” says K.T.S.V. Prasad, former director of Averbhav, an alternative school. A lot of importance is given to aspects such as appreciation of the fine arts and nature and the freedom of enquiry, which help in building a person as a whole. While children are given the freedom to pursue their own interests initially, they are taught language and mathematical skills as they grow up.

What Next?
The main question facing a parent is, “Will my child fit into the mainstream after his formative years?”

Alternative schools have different ways of dealing with this. Some may be only up to Class 5 or Class 8, after which the student is expected to get admission into a mainstream school. Other schools follow a different approach and take the onus of preparing their students for the board exams. The student has the options of the National Institute of Open Schooling (NIOS) and the International General Certificate of Secondary Education (IGCSE). Both have been recognised by Association of Indian Universities to be on a par with certificates awarded by other boards—ICSE, CBSE and state boards. the student passes NIOS or IGCSE with the required subjects, he is eligible for admission to mainstream schools in the country. He may then go on to pursue a career of his choice. Some schools also permit students to sit for senior secondary (Class 12 exams) under IGCSE and NIOS, after which they can get admission into any university.

Costs
Alternative education tends to be more expensive than mainstream education. That is not only because the student-teacher ratio is low, but also because the child is provided many facilities and also encouraged to take up extra-curricular activities such as sports and the performing arts. However, for schools run by charitable institutions, fees are on the lower side.

Fees can be between Rs 6,000 per annum and go up to Rs 35,000 per annum or more if it is a residential school. The expensive schools ask parents who can afford it to volunteer to pay higher fees so that students from a cross-section of society can be taken in. Chowgule stresses that no child is refused admission because of monetary reasons.

Viability
“Admitting a child into an alternative school does lead to his all-round development in the formative years,” says Shakun Chaudhury, Director, Ibambini pre-school, Gurgaon. However, before selecting an alternative school, one should check its background and also look at the alumni to see how many of them have managed to successfully integrate into mainstream education. “Ii tell parents to check if a school meets their criteria. One has to visit several schools before deciding what is best for one’s child,” says Chaudhury.


Students passing from alternative schools might find it a bit difficult to adjust to the mainstream. However, this varies from student to student. Students need the support of parents and teachers to make this transition. “Alternative schools have understood this and started preparing students for the pressures of the competitive world in the higher classes,” says Malhotra. “one feels that the child is cut out to join IITs or top medical colleges, one should shift him into a school under the CBSE, as the syllabus is more tuned to such competitive exams,” she adds.

So, if you do not want your child to be burdened by homework, tuitions and a heavy school bag from an early age, alternative education is the option to explore.

Source - outlookindia.com

Meet the Earnings Yield

One way to think about what you're paying for a company is to look at its price-to-earnings, or P/E, ratio. Another way is to calculate the inverse of that, which is its earnings yield.
Consider the example of Fryyndar and Ulf Scandinavian Pharmaceuticals (ticker: FANDU), whose motto is "Varsagod och svalj!" (That's Swedish for "Here, swallow this pill!") To calculate its P/E ratio, you simply divide the current stock price by the annual earnings per share (EPS). If its current annual EPS is $3 and the stock is trading for $111 per share, the P/E is $111 divided by $3, or 37.
To calculate Fryyndar and Ulf's earnings yield, just reverse the P/E ratio, dividing the annual EPS by the current stock price. $3 divided by $111 equals 0.027, or 2.7%. Compared to risk-free Treasury bond rates (of roughly 4.7% at the time of this writing), this doesn't appear to be a bargain. But remember: Whereas bond rates are usually fixed, earnings typically grow. Imagine that FANDU is expected to increase earnings 10% per year. If so, in 10 years EPS should grow to $7.78. Assuming we bought shares when they were at $111, the earnings yield for us has now become 7%, considerably better. ($7.78 divided by $111 is 0.07.)
It can be instructive to see how long it takes for the growing earnings yield to pass the current 30-year bond rate, which was recently around 4.7%. FANDU passes it within six years. (You can also compare it with shorter-duration bonds, and you can look up current bond rates on Yahoo!)
If your desired rate of return on your invested dollars is 15%, it will take FANDU 18 years to reach that target -- if earnings actually grow at the estimated pace, that is. Perhaps you can find another investment that will get you there more quickly. With riskier companies, you might look for them to pass your target rate sooner rather than later.
The earnings yield is just one of many investor tools. It shouldn't dictate any decision for you, but it can help you think more effectively about your expectations for investments.

Source - fool.com

How to read a balance sheet

A balance sheet, also known as a "statement of financial position", reveals a company's assets, liabilities and owners' equity (net worth). The balance sheet, together with the income statement and cash flow statement, make up the cornerstone of any company's financial statements.

If you are a shareholder of a company, it is important that you understand how the balance sheet is structured, how to analyse it and how to read it.

How the balance sheet works

The balance sheet is divided into two parts that, based on the following equation, must equal (or balance out) each other. The main formula behind balance sheets is:

assets = liabilities + shareholders' equity

This means that assets, or the means used to operate the company, are balanced by a company's financial obligations along with the equity investment brought into the company and its retained earnings.

Assets are what a company uses to operate its business, while its liabilities and equity are two sources that support these assets. Owners' equity, referred to as shareholders' equity in a publicly traded company, is the amount of money initially invested into the company plus any retained earnings, and it represents a source of funding for the business.

It is important to note, that a balance sheet is a snapshot of the company's financial position at a single point in time.

Know the types of assets

Current assets
Current assets have a life span of one year or less, meaning they can be converted easily into cash. Such assets classes are: cash and cash equivalents, accounts receivable and inventory. Cash, the most fundamental of current assets, also includes non-restricted bank accounts and checks.

Cash equivalents are very safe assets that can be are readily converted into cash such as US Treasuries. Accounts receivable consists of the short-term obligations owed to the company by its clients. Companies often sell products or services to customers on credit, which then are held in this account until they are paid off by the clients.

Lastly, inventory represents the raw materials, work-in-progress goods and the company's finished goods. Depending on the company, the exact makeup of the inventory account will differ. For example, a manufacturing firm will carry a large amount of raw materials, while a retail firm caries none. The makeup of a retailers inventory typically consists of goods purchased from manufacturers and wholesalers.

Non-current assets
Non-current assets, are those assets that are not turned into cash easily, expected to be turned into cash within a year and/or have a life-span of over a year. They can refer to tangible assets such as machinery, computers, buildings and land.

Non-current assets also can be intangible assets, such as goodwill, patents or copyright. While these assets are not physical in nature, they are often the resources that can make or break a company - the value of a brand name, for instance, should not be underestimated.

Depreciation is calculated and deducted from most of these assets, which represents the economic cost of the asset over its useful life.

Learn the different liabilities

On the other side of the balance sheet are the liabilities. These are the financial obligations a company owes to outside parties. Like assets, they can be both current and long-term. Long-term liabilities are debts and other non-debt financial obligations, which are due after a period of at least one year from the date of the balance sheet.

Current liabilities are the company's liabilities which will come due, or must be paid, within one year. This is comprised of both shorter term borrowings, such as accounts payables, along with the current portion of longer term borrowing, such as the latest interest payment on a 10-year loan.

Shareholders' equity

Shareholders' equity is the initial amount of money invested into a business. If, at the end of the fiscal year, a company decides to reinvest its net earnings into the company (after taxes), these retained earnings will be transferred from the income statement onto the balance sheet into the shareholder's equity account.

This account represents a company's total net worth. In order for the balance sheet to balance, total assets on one side have to equal total liabilities plus shareholders' equity on the other.

Read the Balance Sheet
Below is an example of a balance sheet:

Source: http://www.edgar-online.com

As you can see from the balance sheet above, it is broken into two sides. Assets are on the left side and the right side contains the company's liabilities and shareholders' equity. It also can be seen that this balance sheet is in balance where the value of the assets equals the combined value of the liabilities and shareholders' equity.

Another interesting aspect of the balance sheet is how it is organized. The assets and liabilities sections of the balance sheet are organised by how current the account is. So for the asset side, the accounts are classified typically from most liquid to least liquid. For the liabilities side, the accounts are organized from short to long-term borrowings and other obligations.

Analyse the balance sheet with ratios

With a greater understanding of the balance sheet and how it is constructed, we can look now at some techniques used to analyze the information contained within the balance sheet. The main way this is done is through financial ratio analysis.

Financial ratio analysis uses formulas to gain insight into the company and its operations. For the balance sheet, using financial ratios (like the debt-to-equity ratio) can show you a better idea of the company's financial condition along with its operational efficiency. It is important to note that some ratios will need information from more than one financial statement, such as from the balance sheet and the income statement.

The main types of ratios that use information from the balance sheet are financial strength ratios and activity ratios. Financial strength ratios, such as the working capital and debt-to-equity ratios, provide information on how well the company can meet its obligations and how they are leveraged.

This can give investors an idea of how financially stable the company is and how the company finances itself. Activity ratios focus mainly on current accounts to show how well the company manages its operating cycle (which include receivables, inventory and payables). These ratios can provide insight into the operational efficiency of the company.

There are a wide range of individual financial ratios that investors use to learn more about a company.

Conclusion

The balance sheet, along with the income and cash flow statements, is an important tool for investors to gain insight into a company and its operations. The balance sheet is a snapshot at a single point in time of the company's accounts - covering its assets, liabilities and shareholders' equity.

The purpose of the balance sheet is to give users an idea of the company's financial position along with displaying what the company owns and owes. It is important that all investors know how to use, analyse and read one.

Source - Investopedia

Importance of Enterprise Value

Wall Street tracks market cap religiously while too often ignoring the more important enterprise value, which is the true economic value of a company at any given moment. Enterprise value is market cap plus long-term debt and minus cash and equivalents, for reasons explained today. This column originally ran December 4, 1997.

By Randy Befumo
February 21, 2002

A topic I want to cover is "enterprise value," which has confused quite a few Fools the country o'er.

Enterprise value is a measure of the actual economic value of a company at any given moment. Enterprise value measures what it would actually cost to purchase the entire company. Many investors use the current value of all of a company's outstanding shares as a proxy for its economic value. Known as market capitalization, the current market value of all of a company's shares is equal to the current number of outstanding shares multiplied by the current share price:

Market Capitalization = Number of Shares Out * Current Share Price

You can find the current share price almost anywhere, thanks to the wonder of 15-minute delayed and real-time quotes. Shares outstanding can be a little trickier, but truth be told I only use one source to find this number -- the latest quarterly earnings press release or SEC filing. Although the number appears in the quote feeds of a number of data providers, I have found that it often lags the latest reported quarter by a couple of weeks and seldom takes into account in timely fashion the shares issued to acquire another company.

Now, if market capitalization is the value of all of the outstanding shares, why use enterprise value at all? I mean, enterprise value only appears in a few business school textbooks that focus on cash-flow valuations. The rest of the investment media uses market capitalization. Well, let me let you in on a little secret. Wall Street is many things, but it is not thorough and it is not scientific. In fact, it is downright scary when you look hard enough and see that there is really no unified body of knowledge outside of the quite excellent Chartered Financial Analysts program (which has only about 40,000 graduates total ever) that analysts, market strategists, and pundits draw from. Carpentry (a quite noble profession) has a more rigorous set of intellectual standards.

Although market capitalization is the key component of the actual economic value of a company, it is hardly the only one. Using only market capitalization to value companies is kind of like using the down payment on a house as a proxy for how much a house is worth. The larger the mortgage on the house is, the more wrong you end up being. When a company carries long-term debt, which is essentially what a mortgage is, the company has pledged its own assets to borrow money. If someone were to acquire that company, she would also acquire responsibility for that debt. Much like the person who "assumes" a mortgage of $50,000 after paying $20,000 in equity for a home, a company that pays $20 million for the stock of a company with $50 million in debt has really paid $70 million for the entire company.

The simple fact is that debt matters. Now, many companies have an inconsequential amount of debt; however, there are plenty where the amount of debt that the company has is quite consequential. A controversial, Nobel prize winning economic theory called M&M (after two professors named Modigliani and Miller) proposed that the effective capital structure of a company was the market value of its equity plus its debt. The controversial part was when they went on to say that there is no optimum capital structure, meaning that every dollar of debt a company carried consumed a potential dollar of equity. Put another way, a company's value was a given. Whether it chose to recognize that value all in debt or equity was the company's choice -- there was no capital structure that resulted in a higher valuation without increasing earnings somehow.

Another very important factor to consider when analyzing a company is what it has in the bank. If a company has a hoard of cash or significant equity stakes in other publicly traded businesses, these are pretty easy to value and are obviously sources of liquidity for the company. Going back to our home example, say you bought a home for $70,000 -- $20,000 in cash and $50,000 in debt after assuming the mortgage. When you walked in the house, you found $20,000 in cash left by the previous owner. After putting this $20,000 in the bank, your effective purchase price becomes $50,000. Although you paid out $20,000 to the owner, you got it right back.

Because of the rather complicated rules of acquisition and corporate ownership, this somewhat ludicrous example happens all of the time in the business world. If a company has $20 million in cash in the bank, it is not like the outgoing Chairman can put it in his pocket as he leaves. That money belongs to the company -- and those who own the company. If someone is buying the company, that money really belongs to him or her. No one else can take it. As a result, when the old owners are paid off they are paid off with cash from the new owners -- leaving any cash in the company behind for the new owners to keep. Given that equity stakes in other publicly traded companies are really just as good as cash -- heck, maybe even better -- it makes sense to count this as part of the cash hoard for the purposes of determining what the actual economic price of a company is.

Given all of this, you can see that the real, economic purchase price of a company at any given moment is the value of the stock (the market capitalization), plus the debt that the company has taken on, minus any cash or investments it has on the books. This is what we call enterprise value. We use this instead of market capitalization because it is the actual economic purchase price of a company at any given moment. Enterprise value reflects the actual purchase price anyone acquiring a company would have to pay.

Enterprise Value = Market Capitalization + Long-term Debt - Cash & Investments

Why go to all of this trouble when some people argue that the value of the stock has already been adjusted for the debt and cash a company has? Because no matter how much the actual price of the stock changes, the debt and the cash do not go away. An acquirer still has to take on the debt and still gets to put the cash in the bank whether the company's stock is worth $1 billion or one dollar. Debt and cash are economic realities and must be factored into the purchase price an acquirer pays for a company. Enterprise value is not a valuation, meaning the theoretical price at which a company should trade, but a value, meaning the current, real price as definite as if stuck on with a pricing gun.

Randy Befumo is a former Fool writer currently working in the investment industry. This column first appeared on the Fool in 1997.

- fool.com