Enterprise value

Category:Metrics
Alternative names: EV total enterprise value firm value acquires value acquirer's multiple

What is enterprise value

Enterprise value (EV) is basically a modification of market capitalisation value adjusted for the company debts and cash. It is more thorough way of assigning valuation as it looks at the entire market value rather than just the equity value of a company. Enterprise value is one of the fundamental metrics used when estimating vale when acquiring a business. The calculation is not solely based on the equity value but it adjust for any shot-term and long-term debts that the company has as well as cash on the balance sheet.

How to calculate enterprise value (formula)

The formula for enterprise value is:

EV = Market Capitalisation + Total Debt – Cash and Equivalents

You can calculate the enterprise value of a company form the balance sheet. To calculate the market capitalisation you would have to multiply the number of outstanding shares by the current stock price. The cash and the total debt number can be found on the company’s balance sheet (including both short-term and long-term debt).

Why is enterprise value useful

One way to think about Enterprise value is to think as the enterprise value being theoretical takeover price for the company. If someone is about to acquire the whole company this will be the theoretical price paid. It’s more “accrued” than pure market capitalisation as it penalises companies that have a lot of debt on their balance sheet (as the debt will eventually need to be repaid by the acquire). It also awards companies that have cash on their balance sheet. In addition, it is useful for comparing companies with different capital structures because a change in capital structure will not affect the amount of enterprise value.

Enterprise value vs market cap

Enterprise value and market cap are both measurements of company value but they are not identical or interchangeable. Market capitalisation is the total value of a company outstanding shares based on the price that the market is currently pricing the company. Enterprise value on the other hand can be looked as the company’s theoretical takeover valuation as it looks at the entire market value (including debt and cash) rather than just the equity value of a company

Enterprise value in valuation multiples

Enterprise Value is often used in multiples such as EV/EBITDA, EV/EBIT, or EV/Sales for comparing valuation of different companies. Using EV multiple instead of commonly used price multiple like PE, PB, PS etc. has some advantages as regular price based multiples fo two take into account cash and debt. This means that two companies with identical market caps may cave completely different enterprise values based on how their balance sheet looks like.

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