Krishan's Leverage EV Case

[midas]

Forum readers:

Krishan had a very interesting post describing EV vs. stock price and came to the conclusion that having large cash balances "cushions" the fall of a stock price due to the theory of EV.

On a percentage basis this is true because no matter what the overall health of a business - cash doesn't change its value thus providing a floor a Company's EV - but you pay a higher stock price for these Companies relative to there EV so drops in price seem lower as a percentage of value. So someone who cares about their % loss likes the high cash balance case but the stock price rises less in good times hurting your % upside.

In reality, in a sale, all investors lose the same amount of money - $5 per share and vice versa in a rising company.