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What the Fortune 500 Tells Us

August 4, 2016

In June, Fortune gave us their 500 largest companies list in sales, profits, market capitalization (“market cap”) and some other criteria. My question is does this tell us anything? I think so.

To simplify my analysis I separated the list into the top 50 companies based on sales. That resulted in a grouping that represented 47% of the sales and 51% of the profits. So in numbers we picked about half which should be a pretty representative group. Additionally the total assets were 55%, stockholders’ equity 46% but the market cap was only 41%. This is our first major difference – What this means is that the price earnings (“P/E”) ratio is lower on the top group than the 450 group.

Using the Fortune numbers, the P/E ratio for the top 50 is 16.22 rather than 24.37 for the 450 group. Here the Top 50 comes out much better than the 450. Note that the P/E for the entire 500 companies is 20.21, a number that is not as informative as the two separate P/Es we obtained by the bifurcation. It seems the larger companies are priced lower than the smaller ones. However the debt to equity ratio for the 50 is a very high 5.84 while for the 450 is 3.94. The 5.84 seems very high (as does the 3.94 but the 5.84 is way out of sight). This could mean a vulnerability to losses or increasing interest rates.

Here is another observation. The excess of market cap over book value for the 50 is $3.873 billion and $6.476 billion for the 450. These amounts were determined by market forces that on some basis, in my opinion, should base most company values on earnings and expected dividends. The P/E is a reflection of this. Another reflection of value is the intrinsic value which supposedly is represented by book value, but is not really so. The excess market cap balances this off and is comprised of a number of components including real estate and equipment that is used daily but whose full values are not reflected on the books of the companies that are using these assets, land that was purchased generations ago that is on the books at the original costs, other assets, tangible and intangible, that are generating revenue that also are not reflected on the books such as the animated movies Disney made in the 1940s and Coca-Cola’s secret formula. If we can determine those true market values and can add them to the book values the differences between market cap and book would make much more sense and the intangible value that is really a buffer adjustment to reflect the companies’ values based on earnings might appear more reasonable. This being so, then perhaps the debt to equity ratios are not as high as they appeared earlier in this article. This is so because we should add the excess of the actual values to the book. To be completely religious we should then tax effect the excess values, but I am not trying to be super scientific but rather to illustrate the art of valuing a company.

The Fortune 500 list offers a wealth of information, but to get benefit from it careful analyses need to be considered and then thought about and deliberated and acted on, if appropriate. If anything, it is complicated with a lot of moving parts. There doesn’t appear to be an easy way to determine value. Use this article as a brief lesson on company valuations and if you care, a beginning. I leave it to you to draw your own conclusions and to make your decisions based on that.

Here is a link to the entire article:

Assistance for this article was provided by Stephen Panfile, a summer intern at Withum.

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