Enterprise Value and Equity Value

Enterprise Value (EV): value of a company's core business operations to all investors

Equity Value (EqV): value of everything a company has to its equity investors (common shareholders)

Equity Value & Enterprise Value Conversion:

EV = EqV - Cash + Debt + Non-Controlling Interests + Preferred Stock
EqV = EV + Cash - Debt - Non-Controlling Interests - Preferred Stock

EV, in broad terms, is the present value of a company's future cash flows. The excess cash (not all cash is excess cash) on the books is a non operating asset (non core business operation). It does not aid the generation of future cash flows and therefore does not contribute to value. That's why it is subtracted
Also, the equity value of a company already includes the cash on the company's balance sheet. So we need to subtract it or else we'd be double-counting
From an intuitive standpoint: when we acquire a company, we'd get the excess cash as part of the deal, lowering the purchase price
In the case of a company with a large cash balance (e.g. a bank), we could have negative EV

Noncontrolling interests: the amount of a company that you don't own. Used when a company owns more than 50% but less than 100% of another company. Appears on the balance sheet under shareholder's equity. We add noncontrolling interest because it represents another investor group that the enterprise value encompasses

Enterprise Value Calculation Example

Let's think about this more intuitively:
Say we want to buy Company A with a market cap (equity value) of $10, cash of $5, and debt of $2.

First, we obviously pay off the market cap of $10. Let's call this our purchase price for now
Now, we want to pay off Company A's $2 debt. But since Company A already has its own cash of $5, we use that to pay off the debt instead of our own money. Now we have a remaining $3 in cash
We will pay ourselves a dividend using that remaining $3 in cash. Now that we received $3 in cash, we're gonna subtract that from our purchase price
$10 - $3 = $7. This means that our effective purchase price is $7
In other words, the enterprise value for Company A is $7

Valuation Multiples:

Enterprise value / EBIT
Indicates how many times the company's value is worth compared to its earnings
E.g. if a company's EV/EBIT is 5, it means the company is worth 5 times the money it makes

By excluding non-cash expenses like D&A, interest, and tax rate, it provides a measure of the company's cash flow from operations
Indicates how many times the company's value is worth compared to its earnings

Price-to-earnings ratio
How much people are willing to pay vs. how much the company makes
E.g. if PE ratio is 10, it means people are willing to pay 10 times the money the company makes, so higher PE ratio = people think it's more valuable

There is no best profit measurement. They all tell slightly different variations.

EV/EBITDA is better when you want to completely exclude the company's Capex, D&A, and interest
EV/EBIT is better when you want to factor in D&A; this is common in manufacturing or industrials
P/E is better when you want to factor in interest and non-core business operations; more relevant for commercial banks or insurance firms when you want to factor in interest income and expense

EBIT vs. EBITDA vs. Net Income

Reflects operating expenses and after-effects of Capex, but not Capex directly
EBIT, Operating income, Operating margin, and Operating profit all mean the same thing

EBITDA = a proxy for core business cash flow from operations before the impact of interest and taxes

Reflects everything: operating expenses, the after-effects of Capex, interest, taxes, and non-core business activities

The Bull's Pen