|Current Market Capitalization||378||241|
|+ Total debt||0||12|
|- Cash and investments||140||70|
|= Value of operations||238||183|
|Value of operations/2012 Earnings||5.71||10.76|
Starting from the market capitalization, the value of operations is calculated by adding back any debt used to finance the company and subtracting out holdings of cash and investments that are not part of operations.
The calculation reveals that the operating values of the two companies are not that different - $238 billion for Apple versus $183 billion for Microsoft. But the earnings are vastly different. Apple’s 2012 earnings of $41.7 billion were almost 2.5 times greater than Microsoft’s earnings of $17 billion. Consequently, for the two values to be approximately equal the market must be placing a much greater operations multiple on Microsoft than Apple - the table shows it does. Because the primary determinant of the multiple is future long-run growth, the analysis reveals that the market is much more pessimistic as regards Apple than Microsoft. The market is saying that if Microsoft is dying, Apple is moribund.