>- Imagine a company with 0 market cap and 0 cash, but 100M in debt. That company would be "enterprise valued" at 100M.
The fallacy here is assuming that market cap is an independent variable, whereas in real life it's dependent on cash/debt. This makes sense, because a company loaded with debt would be less valuable to shareholders, since the debt has to be serviced which eats into future profits. If you set all 3 values arbitrarily, of course you're going to get absurd results. It's not any different than setting the side lengths of a right angle triangle to arbitrary values, then complaining that the Pythagorean theorem is broken.
In other words market cap is assumed to be representative of the company's "actual value" (i.e. whether it is a good investment, profitable, whatever) and the other variables are meant to correct for factors the market cap presumably does not consider.
But that is still counter-intuitive if we use an intuitive understanding of "value" (i.e. worth preserving/having/acquiring). The company in this example would have no worth but EV of 100M. If you buy it, you would have gained nothing and spent 100M. Realistically with (near) zero market cap the company is likely defunct or worthless, with zero cash and massive debt it's likely bankrupt.
Realistically it's just a base "buying price". To fully buy out and own a company you would need to buy all the stock (market cap) and then pay off all the debt but you could use the cash for that. That's "value" in the modern economical "market price" sense, not in any intuitive sense. And it doesn't even mean paying that price would be a good investment because two different companies may have the same price but be hugely different in terms of potential ROI. Notably it only accounts for assets in the sense that the market cap might consider them - but we all know (do we?) that the stock market is not rational even when it can be rationalized otherwise we would be better at predicting it (notably a lot of "experts" perform worse than chance when trying to predict it).
I guess if you wanted to account for value in the sense of "worth" the formula would have to be a multiplier of the share price as a share price of zero would presumably mean the market sees no use in it and the other factors don't matter (but then again there's no good reason why debt would factor into it positively because it's merely a proxy for capital based on the assumption that it's used for investments rather than cashflow).
I did touch on this: "Or maybe not even include the cash and borrowings, or do some more advanced calculations I don't know about, since the market probably accounts for those indirectly on the market cap".
If they are not independent variables, then it's also not fair to plainly add variables that depend on each other, since they will give a skewed value given that simple addition would assume they are independent.
The fallacy here is assuming that market cap is an independent variable, whereas in real life it's dependent on cash/debt. This makes sense, because a company loaded with debt would be less valuable to shareholders, since the debt has to be serviced which eats into future profits. If you set all 3 values arbitrarily, of course you're going to get absurd results. It's not any different than setting the side lengths of a right angle triangle to arbitrary values, then complaining that the Pythagorean theorem is broken.