Enterprise Value
IntermediateEnterprise value is a measure of a company's total value, including both its equity and its debt, minus its cash. It represents roughly what it would cost to buy the whole business.
Market capitalization shows only the value of a company's shares. But a buyer who acquires a company also takes on its debts, and receives its cash. Enterprise value adjusts for both.
A basic calculation is market capitalization plus total debt minus cash and cash equivalents. Some versions also add preferred shares and minority interests.
For example, a company with a market capitalization of 2,000 million, debt of 500 million and cash of 200 million has an enterprise value of 2,300 million.
Enterprise value is useful because it is not affected by how a company is financed. Two companies with identical businesses but different levels of debt will have different market capitalizations, but similar enterprise values. This makes enterprise value better for comparing companies, especially when combined with measures of operating performance, such as EBITDA, in multiples like EV/EBITDA.
The cash is subtracted because a buyer could, in principle, use it to pay down part of the debt or recover part of the purchase price.
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