If the share price is zero, why is GAME Group “Worth” £91 million?

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The current challenges at GAME Group, which won’t be stocking games from EA or Nintendo, have hit its share price, which is currently trading at 5.0p (down 15% on the day), giving the company a market valuation of £20.74.

That’s not the full picture. Because the real value of a company (known as the Enterprise Value) is the market value of a company PLUS the value of its debt MINUS the value of its cash.

What!? Cash has a negative value?

Yes, it does. Let me give you an example.

Apple currently is the most valuable company in the world by market capitalisation. With a share price at $535, it has market capitalisation of $490.2 bn.

According to Apple’s most recent 10-Q (its quarterly financial filing with the SEC), Apple had cash of $10.3bn, short term marketable securities of $19.8 billion and long-term marketable securities of $67.4 billion for a total of $97.5 billion.

(Note that for many companies, you would only consider cash and short-term marketable securities to be cash-equivalents. But Apple’s long term marketable securities all look like tradable assets, so I think most people treat them as cash.)

If you were to buy Apple, you would have to shell out $490 billion. But you would immediately own $97.5 billion of cash, meaning that your effective outlay is $393 billion.

Hence Apple has an Enterprise Value of $393 billion.

So what is GAME worth?

According to GAMES’s July 2011 interim statement, the company had:

• Cash and cash equivalents: £41.0 million
• Current portion of long-term borrowings: £109.2 million
• Long term borrowings: £22.7 million

Adding up the debt and subtracting the cash gives a net debt figure of £91.0 million.

Even if GAME’s share price falls to zero, anyone buying the group would need to assume debts of £91 million.

Cash and debt are not the only items on the balance sheet. There’s property, plant and equipment of nearly £100 million (although everyone knows that the value of that collapses in a fire sale), intangible assets of £212 million (probably things like brands and also an accounting catch-all called goodwill used to track the difference between the tangible value of a company that has been acquired and the actual amount paid for it) and stock of £145 million.

Plus, of course, this balance sheet is 6 months old. Since then we’ve had Christmas, the biggest game launch ever, and a disastrous first couple of months at UK retail. GAME’s cash and debt figures could be very different. Indeed, GAME’s recent crisis talks with its lenders suggest that they are.

(In fact, some analysts are suggesting that GAME had a net cash balance at its year end in January 2012, but owed a substantial amount to publishers. This time last year, GAME had £120 million in net cash, and owed suppliers £294 million, which suggest the January 2012 figures may look very different from the interims.)

But however you look at it, GAME would cost a lot more than its market value to buy. Always look at the Enterprise Value.

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