Why is Cash subtracted in the Enterprise Value formula?

Question

Accepted Answer

Cash is subtracted in Enterprise Value formula to reflect the fact that it is a non-operating asset and can be used to pay off debt or fund operations.

Cash is considered a non-operating asset as it is not directly related to the core operations of the business.
By subtracting Cash from Enterprise Value, we are essentially adjusting the value to reflect the fact that Cash can be used to pay off debt or fund operations.
This adjustment provides a more accurate representation of the true value of the business to potential acquirers or investors.
For example, if a company has $100 million in Cash and $50 million in debt, subtracting the Cash would result in a higher Enterprise Value of $50 million.

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Why is Cash subtracted in the Enterprise Value formula?

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