{"id":2092,"date":"2022-12-16T12:30:00","date_gmt":"2022-12-16T17:30:00","guid":{"rendered":"https:\/\/theforage.wpengine.com\/?p=2092"},"modified":"2024-07-22T17:23:58","modified_gmt":"2024-07-22T21:23:58","slug":"enterprise-value","status":"publish","type":"post","link":"https:\/\/theforage.wpengine.com\/skills\/enterprise-value","title":{"rendered":"What Is Enterprise Value (EV)?"},"content":{"rendered":"\n

Enterprise value, or EV, is a form of business valuation finance<\/a> professionals often use in mergers and acquisitions (M&A)<\/a>. To calculate EV, you  add together a company’s market capitalization (how much its publicly traded shares are worth) and total debt, and subtract its highly-liquid assets<\/a>, like cash or savings. <\/p>\n\n\n\n

Enterprise Value Definition<\/h2>\n\n\n\n

Enterprise value (EV) is a form of business valuation<\/a> or a way to determine how much a company is worth. Some forms of business valuation focus on profitability or how well the company can produce future returns for investors. EV, on the other hand, explains how much a business is worth in terms of purchase price. Essentially, if you wanted to buy a public company, you would need to pay off all the company’s debts and buy out  its shareholders \u2014 enterprise value shows how much that would cost. <\/p>\n\n\n\n

The EV business valuation method is especially useful for comparing companies with different capital structures or ratios of debt to equity. Calculating EV involves adding the company’s total debt and equity, so companies with different debt-to-equity ratios can be compared on more even ground.<\/p>\n\n\n\n\t

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Who Uses Enterprise Value?<\/h3>\n\n\n\n

Enterprise value is a key valuation method in mergers and acquisitions. In M&A, investment bankers<\/a> compare companies to help their clients decide if buying or merging with another company is beneficial. <\/p>\n\n\n\n

However, EV is also a metric used in other calculations and formulas throughout corporate finance and accounting<\/a>. For example, accountants<\/a> and financial analysts<\/a> use enterprise value in ratios against things like EBITDA<\/a> (earnings before interest, taxes, depreciation, and amortization) \u2014 this ratio creates a relative value they can use to compare companies in a slightly different context.  <\/p>\n\n\n\n

>>MORE:<\/strong> Financial Analyst vs. Accountant: What’s the Difference?<\/a><\/p>\n\n\n\n

How to Calculate Enterprise Value<\/h2>\n\n\n\n

The enterprise value calculation involves subtracting the company’s cash or liquid assets (not including stocks or other securities) from the sum of its total debt and market capitalization. <\/p>\n\n\n\n

Enterprise Value Formula<\/h3>\n\n\n\n

EV = Market Cap + Total Debt – Cash<\/em><\/strong><\/p>\n\n\n\n

Components of EV Calculation<\/h3>\n\n\n\n

Market Cap<\/h4>\n\n\n\n

Market cap, or market capitalization, is the current market value of the company’s outstanding shares (or the number of shares the company sold to shareholders). Market capitalization is also called equity value.<\/em> Market capitalization is the total number of shares multiplied by the current share price on the market. This metric judges how big a company is \u2014 the higher the market cap, the bigger the company. <\/p>\n\n\n\n

Total Debt <\/h4>\n\n\n\n

A company’s total debt is all the money it owes to lenders or creditors. This includes both short- and long-term debt. Debt can also be called liabilities<\/a> \u2014 money the company owes to other people. <\/p>\n\n\n\n

Cash <\/h4>\n\n\n\n

Cash is the company’s liquid assets<\/a>, such as paper currency, savings, and checking accounts. This does not include marketable securities like stocks, even though those are liquid assets, because the value of the stocks is a part of market capitalization or equity value.<\/p>\n\n\n\n

When we subtract cash from the company’s total debt, we get net debt <\/em>\u2014 if you buy the company and inherit its liquid assets, the cash and liquid assets can offset some of the total debt, leaving only the company’s net debt.<\/p>\n\n\n\n\t

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Example Enterprise Value Calculation<\/h3>\n\n\n\n

Enterprise value constantly changes because stock prices fluctuate, meaning a company’s market cap and EV at 10 a.m. may be different at 4 p.m. To better understand how to calculate enterprise value, let’s make an imaginary company. <\/p>\n\n\n\n

From the company’s balance sheet<\/a> and current market information, we can get the following details:<\/p>\n\n\n\n