Hey, everyone.
I am learning about trading comps and I was curious why Enterprise Value is calculated as Market cap - Cash + Debt? Why do we subtract the cash and add the debt instead of vice versa? It seems that if we want to see the value of a company, we should subtract the debt and add the cash the company has.
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Because you are valuing the company's core operations. Both creditors and shareholders have a claim on it. The market cap covers just the equity value so you add debt, but you subtract cash because once you buy the company you can use the cash to pay down the debt, theoretically. Think of it as valuing the assets (left side of the BS) by using the right side of BS.
Don't forget to add preferred stock and non-controlling minority interest in there too.
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