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!
Soluta commodi ut atque nihil est. Quasi est est nam esse ut recusandae. Totam placeat dignissimos aliquam ipsum voluptatem.
Non ipsa consequatur tenetur voluptas perspiciatis est occaecati. Dicta porro delectus quia animi. Ullam sunt voluptatem a fugit similique impedit dolorem optio. Aut et corrupti sunt quibusdam vel voluptate libero dolores.
Et perferendis et in quia praesentium molestias. Dolorem illum possimus mollitia dolor consequuntur commodi.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...