A fixed line telephone and a calculator sit next to a pair of spectacles. (Photographer: Chris Ratcliffe/Bloomberg)

BQLearning: CAGR, Working Capital, Enterprise Value, Book Value Explained

BQLearning is a special show that seeks to demystify financial markets, economic theories, legal processes and political structures.

To understand the financial health of a company, it’s important to go beyond the headline numbers of revenue, profit and margin.

But the jargon that expert investors and analysts use can be daunting.

In this show, Anupam Gupta, a consultant at Aavan Research, throws light on three business concepts- CAGR, Working Capital and Enterprise Value and explains how they are calculated.

What Is CAGR?

Compounded annual growth rate, or CAGR, is used to track the performance of a company over a specified period of time, longer than one year.

Essentially, it’s a number that describes the rate at which an investment would have grown if it had grown at a steady rate, without any volatility. In other words, it’s a way to smooth out the return from investments over time so that they may be more easily understood.

What Is Working Capital?

Working capital is the money required to run the day-to-day operations of a business. It is a measure of a company’s operational efficiency and short-term financial health.

The working capital ratio – the ratio of current assets to current liabilities – indicates whether a company has enough short-term assets to take care of short-term debts. Ideally, a company’s assets should exceed its liabilities. If liabilities exceed assets, that may spell trouble when it comes to paying back creditors. There’s also the risk of bankruptcy.

What Is Enterprise Value?

Enterprise value is a measure of a company’s total value and is a more comprehensive tool to analyse the value of a company versus market capitalisation of equity shares.

Simply put, it is the takeover price of an entity. If a company is to be acquired, this is the price to be paid. Enterprise value is a better metric for assessing mergers and acquisitions that market capitalisation which excludes debt and cash.

What Is Book Value?

Book value is the value of a company to its equity shareholders. Hence, it is also known as shareholders’ equity or net worth.

It is the value at which an asset or security is carried on the balance sheet. Book value represents a company’s worth if it liquidated its assets and paid back all its liabilities.