Some thoughts about Enterprise Value (EV):
- Lets asume you want to buy a house. The house costs 1 millon. But you know that in the attic lies 0,4 millon in cash – and it is sure that you will get that cash when you are buying the house. So, how mutch does the house realy cost, 1 million or just 0,6 million?
- An german airline wants to buy an austrian one (all persons and companys are fictitious). The austrian airline is not in good shape and doesn’t make any money so they buy it vor 1 € – a price less than a hotdog. But the german buyer agrees to also take the debt of the austrian company wich is 5 millon. So again, how mutch does the airline realy cost, 1€ or 5 million?
When you buy a stock it is pretty mutch the same. When you are buying a company with a lot of cash on the balance sheet you can subract the amount* from your buying price when you are buying a company with a lot of debt you should add that to your price.
*with adjustments – you can not reach that money directly -when the company pays it as dividend you have to pay taxes, when the CEO decieds to buy another company with that money, there is the risk that he is of overpaying for a crappy business.