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- the idea behind removing gearing effects is to see how well the company can use a dollar, no matter how obtained.
- I quote here: "Enterprise value was used instead of merely the __price__ of equity because enterprise value takes into account both the price paid for an equity stake in a business as well as the debt financing used by a company to help generate operating earnings... [big snip] ... in other words, P/E is greatly influenced by changes in debt levels and tax rates, while EBIT/EV is not."
Yes I see what you mean, although this is really another version of the ROE verses ROA argument.
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Re EV, the book doesn't say this, but I would have said the small investor should look at EV, because while I can't take over a company, I will likely enjoy a substantial benefit if a bigger investor decides to. As a value investor, relying on other people to reprice an underpriced asset, this is a critical figure for for those other people.
Yes you have a point there, although I still regard with some contempt the investor who has no vision of their own and regards 'selling out' to someone bigger as the only way to get rich. I would never invest in a share solely because I think it *might* be taken over. As it happens I always seem to be fending off takeover offers. But that is because the suitors saw the same fundamental value in the company that I did, not because I bought 'hopeing' to be bought out. Personally I feel being 'bought out' is rather annoying because it forces me to do a whole lot more homework before I decide when I should reinvest the money