Why do you subtract cash and add debt?
Intuition behind the bridge rather than the formula.
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Because EV values the operating business. If you buy the whole company, you take on its debt — someone has to repay it — and you get its cash, which you could use straight away. So the net cost of the business is equity plus debt minus cash. Cash isn't part of what produces EBITDA, and debt is a claim on the business that ranks ahead of the shares.
The full answer
The buyer's view
You pay €1,000 for all the shares of a company with €400 of debt and €100 of cash. You also have to repay the €400 of debt, but you get the €100 of cash. Net cost of the business: €1,000 + €400 − €100 = €1,300 — its enterprise value.
The consistency view
EV is matched against operating earnings (EBITDA, EBIT). Interest on debt sits below EBIT, and interest income on cash too — so neither belongs in the operating value.
A nuance
Only excess cash should be subtracted. Cash needed to run the business (tills in a retailer, minimum operating cash) or trapped in countries where it can't be repatriated is often left in. In a deal, the buyer and seller negotiate exactly this.
Mistakes to avoid
Saying "cash is subtracted because it's already in the share price" without explaining what it means for EV.
Follow-ups they may ask
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