Editing Enterprise value (section)

==Understanding==
A simplified way to understand the EV concept is to envision purchasing an entire business. If you settle with all the security holders, you pay EV. Counterintuitively, increases or decreases in enterprise value do not necessarily correspond to "value creation" or "value destruction". Any acquisition of assets (whether paid for in cash or through share issues) will increase EV, whether or not those assets are productive. Similarly, reductions in capital intensity (for example by reducing working capital) will reduce EV.

EV can be negative if the company, for example, holds abnormally high amounts of cash that are not reflected in the market value of the stock and total capitalization.<ref>[https://www.bloomberg.com/apps/news?pid=newsarchive&sid=ahiVT6vmGNEA&refer=home Cheapest Stocks Since 1995 Show Cash Exceeds Market (Update5)]</ref>

All the components are relevant in liquidation analysis, since using [[absolute priority]] in bankruptcy all securities senior to the equity have par claims. Generally, also, debt is less liquid than equity, so the "market price" may be significantly different from the price at which an entire debt issue could be purchased. In valuing equities, this approach is more conservative than using the "market price". 

Cash is subtracted because it reduces the net cost to a potential purchaser. The effect applies whether the cash is used to issue dividends or to pay down debt.

Value of minority interest is added because it reflects the claim on assets consolidated into the firm in question.

Value of associate companies is subtracted because it reflects the claim on assets consolidated into other firms.

EV should also include such special components as unfunded pension liabilities, [[employee stock option]]s, environmental provisions, abandonment provisions, and so on since they also reflect claims on the company.

There are certain limitations and traps in using enterprise value. One of which can be a simplified aggregation of company's financial situation. One unit of additional debt may not be of same importance as additional one unit of missing cash.<ref>{{Cite web |url=https://valuechasing.com/what-is-enterprise-value-ev/ |title=What is enterprise value (EV) |access-date=2021-02-15 |archive-date=2021-08-01 |archive-url=https://web.archive.org/web/20210801093132/https://valuechasing.com/what-is-enterprise-value-ev/ |url-status=dead }}</ref>

It can be demonstrated that enterprise value depends on the probability of default (the rating) and works as a "negative growth rate" in the future.<ref>{{cite journal |last1=Gleißner |first1=Werner |title=Kapitalmarktorientierte Unternehmensbewertung: Erkenntnisse der empirischen Kapitalmarktforschung und alternative Bewertungsmethoden |journal=Corporate Finance |page=158}}</ref>