Why is cash subtracted from Enterprise Value in calculations?

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In calculating Enterprise Value, cash is subtracted because it has already been accounted for in the valuation of the company. Enterprise Value represents the total value of a business, effectively combining its market capitalization with debt while subtracting cash and cash equivalents. This subtraction is essential because cash is considered a non-operating asset; it does not contribute to the company’s core operations in the same way that other assets, like property or equipment, do.

When evaluating a company's total enterprise value, cash is seen as a surplus that can be used to pay down debt or invested back into the business. Therefore, including cash in the total value would overstate the actual worth of the business that is tied directly to its operational capabilities. By subtracting cash, analysts aim to capture the true value that would be relevant for potential acquirers or investors in assessing the cost to purchase the business, net of cash available on hand.

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