I have read that the benefit of using this vs market capitalisation is that it takes into account the market value of debt as well.
What I don't get is:
market capitalisation relates to equity, and equity relates to net assets (assets less liabilities including debt). Therefore equity has surely already taken debt into account???
example:
building worth £2m
debt worth £1m
equity thus £1m
If you valued the company at market capitalisation of £1m that would be the equivalent of saying the company is worth £2m for the building less it's £1m debt which seems reasonable to me.
Using TEV (or EV) the company is valued at £1m equity plus £1m debt = £2m....the cost of buying it and paying off the debtors. I can't really see the benefit, unless the buyer specifically wants to pay off all the debt in the company.
Any ideas?
What I don't get is:
market capitalisation relates to equity, and equity relates to net assets (assets less liabilities including debt). Therefore equity has surely already taken debt into account???
example:
building worth £2m
debt worth £1m
equity thus £1m
If you valued the company at market capitalisation of £1m that would be the equivalent of saying the company is worth £2m for the building less it's £1m debt which seems reasonable to me.
Using TEV (or EV) the company is valued at £1m equity plus £1m debt = £2m....the cost of buying it and paying off the debtors. I can't really see the benefit, unless the buyer specifically wants to pay off all the debt in the company.
Any ideas?