Final answer:
Equity Value (P) is paired with metrics related to equity shareholders like the P/E ratio. Enterprise Value (EV) is paired with metrics that cover all capital providers, such as EBITDA. The choice depends on whether the metric reflects benefits to equity owners or to all stakeholders including debt holders and preferred equity.
Step-by-step explanation:
When considering financial valuation, it is important to know when to pair a metric with either Equity Value (P) or Enterprise Value (EV). Equity Value refers to the value that is attributable to a company’s shareholders, whereas Enterprise Value takes into account not just the Equity Value, but also other claimholders such as debt holders and preferred equity.
Metrics that reflect the entire economic benefit to all capital providers, such as EBITDA (earnings before interest, taxes, depreciation, and amortization), are paired with Enterprise Value. On the other hand, metrics that are specific to equity owners, like net income or earnings per share, are paired with Equity Value.
Equity Value is used when the financial metric in question relates directly to the benefits received by equity shareholders. This can include measures like the Price to Earnings ratio (P/E ratio), which reflects what investors are willing to pay for a dollar of the company's earnings.
Conversely, Enterprise Value is more appropriate for metrics that consider broader claims on a company's cash flows, beyond just equity holders, such as EBIT or EBITDA multiples. EV is useful when you wish to compare companies with different capital structures on a more uniform basis.