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Lesson 04 of 04

Debt changes the picture

EBITDA looks at operations before interest and some accounting charges. Enterprise value folds debt and cash back into the price tag.

Market cap+ Debt − CashThe business is more than the share price
Debt changes the picture

Keep these

  • EBITDA is not profit and not cash flow.
  • Enterprise value is commonly market cap + debt − cash.
  • Adding debt feels backward until you imagine buying the whole firm.

The lesson

Interest depends on how a company is financed. Depreciation depends on accounting choices about equipment. EBITDA removes those so two firms with different loans and different depreciation schedules can be lined up. The removal is also the danger. A factory really does wear out. Interest really does have to be paid. A company can look tidy on EBITDA and still be short of cash.

Enterprise value answers a different question from market cap: what are the operations worth, once financing is set aside? A buyer who wants the business debt-free must pay the shareholders their price and must also deal with the lenders. Cash the company does not need can reduce that bill. So the usual sketch is market value of equity, plus debt, minus cash.

Analysts argue about which debts and which cash belong in the formula. Leases, pensions, and minority stakes complicate it. Learn the sketch so the vocabulary is familiar. Treat any single EV or EBITDA figure you see on a website as the start of a reading, not the end of one.