Walk me through the enterprise value bridge

Enterprise value measures what the operating business is worth to debt and equity holders together, so the bridge starts from equity value and adds or subtracts items to reach that. I start with diluted equity value: share price times diluted shares, using the treasury stock method for options and adding RSUs and in-the-money convertibles.

Then I add the claims of other capital providers. Debt, including finance leases, and preferred stock both sit ahead of common equity, so a buyer of the whole business has to take them on. I add noncontrolling interest because if the company owns, say, 80% of a subsidiary, it consolidates 100% of that subsidiary's revenue and EBITDA, so EV must include the 20% it does not own to stay consistent with those metrics.

Next I subtract cash and other non-operating assets, such as equity-method investments, because they are not part of operations and their income is not in EBITDA. Finally there are judgment items, such as unfunded pensions, which many bankers treat as debt-like. The test for every item is consistency: if the related earnings are in the metric I divide by, the claim belongs in EV.