Enterprise value

Enterprise value is the value of the operations themselves. Think of it as the cost of owning the business free and clear: buy out the shareholders, settle the debt, and keep the cash that comes with it.

It exists because financing choices move equity value around without changing the underlying business at all. Two identical companies, one funded with debt and one without, have very different equity values and near identical enterprise values. When comparing companies, you almost always want the measure that is not distorted by the capital structure.

The bridge from equity value adds every other claim on the business and strips out anything not operating. Debt is added because a buyer inherits it. Preferred stock and non controlling interests are added because they are claims ordinary shareholders do not hold. Cash is subtracted because the buyer effectively gets it back. Equity investments in associates are subtracted because their earnings never appear in EBITDA.

The pairing rule follows directly. Enterprise value goes with metrics available to all capital providers, so revenue, EBITDA and EBIT. Equity value goes with metrics available only after lenders are paid, so net income and EPS. An EV to net income multiple is meaningless, and knowing why is the point.