Why don’t I include cash in Enterprise Value?

In any sort of assignment that requires of the valuation of a firm, multiples are important because they show relative value. So, what would happen if Enterprise Value multiples included cash? Multiples would be scattered all over the place because of the levels of the various levels of cash firms hold.

Let’s start with a scenario.

Imagine we are Investment Bankers and we are representing our client Cherry Inc., and the owners are attempting to sell the company to cash out. Cherry Inc.’s TTM EBITDA was $80MM, and it held $5MM in cash on its balance sheet.

At the time of their acquisition Pear Co. and Peach Inc. had TTM EBITDA of $100MM and $200MM, respectively. At the time of acquisition Pear Co. had $10MM in cash, Peach Inc. has $50MM in cash.

The deal price (or MVIC) for Pear Co. and Peach Inc. was $270MM and $450MM, respectively. Therefore, our concluded “firm value”/EBITDA multiples are:

  • Concluded Multiples if we didn’t subtract cash from deal price (aka MVIC/EBITDA): Pear Co.: 2.7x, Peach Inc.: 2.25x
  • Concluded Multiples if we DO subtract cash from deal price (aka EV/EBITDA): Pear Co.: 3.0x, Peach Inc.: 3.0x
Applying multiple that satisfies the apples to apples rule, our concluded value of Apple Inc would be:
  • Using Pear Co. deal price multiple: 2.7 x $80MM = $216MM
  • Using Peach Inc. deal price multiple: 2.25 x $80MM = $180MM
  • Using EV multiple: 3.0 x $80MM= $240MM – $5MM cash = $235MM

There are a few things to take from this. First is the obvious difference in the multiples between the two, EV multiples are higher than MVIC multiples because when cash is subtracted out, the numerator is decreased (EV/EBITDA). The second takeaway is that the EV multiples for Pear and Peach are the same, but their MVIC multiples are different. This is due to varying levels of cash held on their balance sheets that were included in multiples. Firms in a specific industry can hold a wide range of cash levels depending on manager expectations and investor sentiment, therefore MVIC multiples are poor representations of market conditions.

The idea is the same in public company approach. When analyzing “Firm Value” multiples, the analyst would calculate the market value of long term debt plus the market value of equity and subtract cash to create more fair accurate representation of firm value.