[ale] OT: corporate finance 101

Tommie M. Jones tj at atlantageek.com
Tue Jan 22 11:32:51 EST 2002


I have been watching this thread and have been holding back comments.  But
I will pipe in.

Stock value (really market cap) theoretically is a representation of two
things.  How cheap capital is (demand/supply type stuff) and how
profitable a company is expected (and the probability of expected
to happen) to be in the near and long term future.

If a company is profitable and doing well and they are fairly well funded
then they should do fine in the long run.

Enron had two problems.

First they had been hiding losses in subsidary (sp?) companies.  Thus
reducing their expected return.

Second and worst of all they had a credibility problem.  They were in the
trading business and credibility is the most important asset they have.
It's like comparing the Nasdaq to the Bermuda stock exchange.  They don't
really do anything much different.  They provide the same service.  They
just have different credibility.

The second problem was caused by the first.  In companies that sell
widgets credibility is not that big of a deal.  I don't care if my
clothespin maker is going out of business.  Heck, maybe they'll have a
fire sell.

Software.  credibility is more important.  I might buy a email program
from a company I am not sure about.  An ERP solution is slightly
different.  I want them around for the long term.

Trading companies is another order of magnitude.  If they're acting as my
clearing house and I buy Dec. energy for march.  What happens if the
trading company goes into chapter 11 the next day before the energy
supplier receives his money.  Do I become a creditor.

Another point is that Enron was not as big as they claim.  From what I
understand any money that went through their network was considered
revenue.  Not just their service fees.


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