Market Cap vs Enterprise Value | Same or Different?
.....Why Enterprise Value is Important?
A company with less or no debt remains an attractive buy option for investors due to the lower risk attached to it.
A company with a high debt and less cash carries a higher risk because the debt raises the costs and therefore it remains less attractive to investors........
Investment rationale for EV/EBIT
The thumb rule says that lower enterprise multiple and higher earnings yields reflect better value for your money. Thus, in this case if the investors will be willing to put their money into the company XYZ as it has lower enterprise multiple and higher earnings yield.
Likewise, the value investors can calculate the other ratio. The thumb rule applies to all the EV ratios despite being large differences in the other financial metrics such as EBITDA, cash flow from operations, free cash flow, sales and revenue, and assets, while keeping the capital structure on neutral.
Thus, once the investors or value investors can find out the enterprise value, he or she can be in a better position to make his or her decision to go for acquisition or not. As such, EV can be considered a critical financial metrics, calculating the enterprise value.
