@mistaTeaI agree with some of your general sentiments about EV....

@mistaTea

I agree with some of your general sentiments about EV. However, I respectfully disagree that 'market efficiency' or 'inefficiency' has any bearing at all on its veracity. Remember, an EV/EBIT ratio is an equivalent to PE (with caveats of course). It utilises the market price, not on the basis that it represents value, but as an indication of what yield one would be extracting if one purchased at the current market price.

I don't have a finance background, so I do not know with any certainty how 'EV analysis' is conventionally employed. My sense is that, as with so much that is conventional, it is usually applied rather mindlessly (I have a particular problem with the EV/EBITDA ratio). I also have a problem with the words 'enterprise value' , as I stated previously. If I had my way, I would re-name it 'enterprise price ' (EP), or better still 'effective price'.

Thinking in terms of fundamental principles (or first principles, if you like) the name 'effective price' makes complete sense. If we add debt to our price (market cap), then we are saying that we are paying off the debt immediately and so our effective price is the EV (I prefer EP). Of course if we do this, our new pre-tax earnings will be the earnings-before-interest-and-tax (EBIT), as there will no longer be a debt to service. This (in my mind) is the only reason an EV/EBIT ratio (or an EBIT/EV yield) makes sense.

Of course we can have a discussion about whether or not this is realistic. Each investing opportunity needs to be treated on its own merits. After all, why should a business retire all its debt, if it has no problem servicing it? In this case, I chose to be conservative because whilst SKT is a strong cash generator, it has rapidly declining earnings, and a debt that looks comfortable today may not be tomorrow. If SKT were to need to re-capitalise itself in the future, say via a rights issue, then we shareholders would be footing the bill. On this basis, our effective purchase (EP aka EV) price would increase.

The important thing is that one think in term of fundamental principles.

Cheers, Mars