Comments on basic EV equation

All the apparatus are taken at market—not book—values, absorption an adept attributes of the EV metric. Some proponents altercate that debt should be accounted for at book value. This is decidedly accordant in defalcation analysis, back application complete antecedence in a defalcation all balance chief to the disinterestedness accept par claims. Generally, also, debt is beneath aqueous than disinterestedness so that the "market price" may be decidedly altered from the bulk at which an absolute debt affair could be purchased in the market. In account equities, this access is added conservative.

Cash is subtracted because if it is paid out as a allotment afterwards purchase, it reduces the net bulk to a abeyant purchaser. Therefore, the business was alone account the bargain bulk to alpha with. The aforementioned aftereffect is able if the banknote is acclimated to pay down debt.

Value of boyhood absorption is added because it reflects the affirmation on assets circumscribed into the close in question.

Value of accessory companies is subtracted because it reflects the affirmation on assets circumscribed into added firms.

EV should aswell cover such appropriate apparatus as unfunded alimony liabilities, agent banal option, ecology provisions, abandonment provisions, and so on, for they aswell reflect claims on the company's assets.

EV can be abrogating in assertive cases—for example, if there is added banknote in the aggregation than the bulk of the added apparatus of EV.

Intuitive Understanding of Enterprise Value

A simplified way to understand the EV concept is to envision purchasing an entire business. If you settle with all the security holders, you pay EV.

Usage

Because EV is a capital structure-neutral metric, it is useful when comparing companies with diverse capital structures. Price/earnings ratios, for example, will be significantly more volatile in companies that are highly leveraged.
Stock market investors use EV/EBITDA to compare returns between equivalent companies on a risk-adjusted basis. They can then superimpose their own choice of debt levels. In practice, equity investors may have difficulty accurately assessing EV if they do not have access to the market quotations of the company debt. It is not sufficient to substitute the book value of the debt because a) the market interest rates may have changed, and b) the market's perception of the risk of the loan may have changed since the debt was issued. Remember, the point of EV is to neutralize the different risks, and costs of different capital structures.
Buyers of controlling interests in a business use EV to compare returns between businesses, as above. They also use the EV valuation (or a debt free cash free valuation) to determine how much to pay for the whole entity (not just the equity). They may want to change the capital structure once in control.