Two businesses can be identical in every operating respect and still look very different on a P/E ratio, simply because one is funded with debt and the other is not. In this Khan Academy lesson, Sal Khan uses a simple pizzeria example to show why, and how enterprise value solves the problem.
- Why enterprise value = market cap + debt − excess cash, explained from first principles rather than as a formula to memorise
- How to work backwards from an enterprise value to the equity value and price per share
- Why multiples based on operating profit compare companies more fairly than P/E
A clear foundation for the Comparable Company Analysis and Precedent Transaction videos in this section, and helpful for any business owner trying to understand why the headline price for a business is not the amount they will receive after repaying debt.