In a recent issue of GigaOm, Marty Wolf poses the following question: "How can it be that a successful company with seemingly healthy revenue growth can decline in enterprise value?
The answer is increasing sales alone rarely translates into value.
"Take a look at Cisco over the last decade," he writes. "On July 31, 2001, the company's fiscal year-end sales were $22.3 billion, and its stock traded at $19.22 ($18.94 adjusted). With 61,467,392 shares outstanding, Cisco's enterprise value was $85.2 billion. On July 31, 2011, Cisco's year-end sales were $43.2 billion and its stock traded at $15.97 ($15.85 adjusted). With 66,850,160 shares outstanding, Cisco's enterprise value had fallen to $60.2 billion."
Over the span of 10 years, Cisco's sales rose nearly 94 percent while its enterprise value actually declined 29 percent. Cisco is not alone among legacy technology companies. Do the same calculation for any number of them and you'll get a similar result.
When it comes to value, what you do matters - the business you're in, the markets you serve. And while sales growth is important, revenue mix and profitability also matter.
Marty adds, "There is one more thing: the enterprise value of your company is based not just on past performance - a fact that Investors in the public market are continually reminded of. To owners of privately held mid-market tech companies: Past performance is no guarantee of your company's value to a potential acquirer because value is also based on what that company can do with your collection of assets going forward."
To see the list and learn more about the Five Ways to Destroy a Company's Value, see the article here.
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