"...don't you feel that one needs to somehow incorporate the company's borrowings into any valuation consideration?"
Here's my 2c, for anyone that is interetsted in the opinion of a TCL ignoramus...
In applying a yield-to-EV assessment (regardles of how one may think about the numerator: FCF, "earnings" etc), I feel that there are two (almost distinct) questions here.
The first question is whether or not the level of debt is putting the enterprise at risk. This question may factor into how we control the risk (portfolio allocation, margin-for-error, give-wide-berth etc.). However, I don not think it is the central question in terms of valuation.
In terms of valuation, the yield we as owners can expect to extract (assuming it is a sustainable yield) is best measured by an un-levered numerator, because the EV is an un-levered denominator. A high level of debt will substantially raise the denominator, and thus the impact of the debt, on the value, will be reflected.
If we bought the entire enterprise, and immediately retired all debt, the price we would pay would be EV, and the "earnings" we would extract would be un-levered.
In actual fact, in a low interest world, where debt is cheap (lower than the cost we as investors would rationally seek in a risky asset), an un-levered yield to EV assessment is conservative. After all, the highest yield will always be obtained by NOT retiring the debt (though the risk will be elevated).
If we choose to make an EV type of yield assessment, and we include the cost of servicing the debt in the numerator, then we are being doubly conservative, and I would think unreasonably so.
If on the other hand we were in a high interest world, an un-levered yield to EV will be much less conservative, and perhaps may even be non-conservative. In this case it may be more prudent to apply a levered yield assessment (such as the more traditional PE). But once again, I think the numerator should still match the denominator (levered-to-levered).
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