EV question
Hey guys, I am in 2nd year of uni (pls don't judge me) and I have a question related to EV. In the EV calculation, you Include (+) debt and exclude (-) cash.
However, why is debt inflating the EV in the calculation? Common sense would tell me to subtract debt and add cash, which is the opposite of the traditional calculation.
Example, assuming that all the unknown mention assumptions are equal
Company A: EBITDA OF 3M, Sector Multiple 5x, Cash 2m, Debt 10M
EV= 15m-2m+10m= 23m
Company B: EBITDA OF 3M, Sector Multiple 5x, Cash 5m, Debt 2M
EV= 15m-5m+2m= 12m
Why should company B worth less than company A. In a value perspective company B should worth more.
The sector multiple is a EV/EBITDA multiple. So you dont add net debt to that anymore.
You would subtract net debt to get to equity value (what would current owners receive if they would sell the company). Then you see that company B's owners are much wealthier: they receive 15+5-2 = 18, where company A's owners only receive 15+2-10=7.
Only when you use an equity multiple like Price/Earnings you would add net debt to get to EV.
Echoing what rover said. Equity value is the value attributable to shareholders, not enterprise value.
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