Is a high EV actually good?
Hi,
why is it actually a good thing to have a high Enterprise Value?
Let's consider two companies (A and B) and say buing out shareholders (Equity Value) would cost $100 for each. Further both would have $20 in Cash with A having debt worth of $50 and B only $30.
--> EV (A) = $100 + $50 - $20 = $130 --> EV (B) = $100 + $30 - $20 = $110
Wouldn't one prefer company B?
Regards
You don’t buy a company’s equity independent of its debt. You buy the whole thing. So your premise is wrong.
Hi,
in another thread I read the best response to s/o askin what the difference between EV and Equity Value is. It was as follows:
"Think about it intuitively, what is EV? EV is the price you have to pay to pay off every stakeholder (i.e. equity and debt holders). Let's say you have company A with 1 $ in equity, 10$ in outstanding loans and 5$ in cash. So, you buy the company for 11$ (1+11) and have 5$ of cash left which you get to pocket, so you effectively only paid 6$ (11-5)."
Actually the Equity Value part seems wrong if you think of a share deal, where you have to take over debt and equity.
You’re thinking about EV backwards. Very simply, the EV is the value of the continuing operations of a business. That value is then distributed to the equity and debt.
Thx a lot!
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