To understand a company’s valuation, there are different ways to analyze it. One of the most popular methods is the Enterprise Value (EV). Enterprise Value is very useful for investors to compare the size of different companies. It also makes it easier for enterprises to identify the value of acquisitions. It is a useful measure of a company’s value that helps investors analyze the market value of a specific company’s operations.
In this article, we’ll give a brief explanation of what enterprise value is and how it’s used. We will also take a look at its formula and an example.
What is Enterprise Value
Enterprise value is a company’s total capitalization. It is the market value of all its equity and debt. Enterprise value also takes all ownership interests and asset claims from both debt and equity as a consideration as well. It also includes claims from all the other sources that a company has, including preferred stock and minority interest.
In simple words, Enterprise Value is the total value of a company that would be paid for by purchasing all the outstanding shares. This measure is usually used in comparisons between different companies because it takes debt and preferred equity into account when measuring the market value.
The importance of Enterprise Value
Enterprise value is an important figure for investors because it helps them to assess the market capitalization of a company. This assists them in comparing different companies and their value.
The importance of enterprise value also lies in its ability to measure the merger and acquisition (M&A) activity of companies. For example, when looking at potential acquisitions, an investor can use the M&A calculator to estimate a company’s size. This will help investors in determining if a company has the financial capability to make an acquisition.
How to calculate Enterprise Value
It is fairly simple to calculate the Enterprise Value or EV. The formula for enterprise value is
Enterprise value = Market capitalization + Total Debt – Cash and Equivalents
An extended version of the formula
Enterprise Value = Common Shares + Preferred Shares + Market Value of Debt + Minority Interest – Cash and Equivalents
Market Capitalization: This is the number of outstanding shares in a company. It can be found on a company’s stocks. If you’re looking at the stock market, it will be in an investor’s toolbar. If you’re looking at a company’s balance sheet, it will be the total number of shares outstanding for its shareholders.
Total Debt: This is the total debt that a company has. The total debt also includes all series of preferred stock and long-term liabilities. The best way to find this information is from a company’s balance sheet.
Cash and Equivalents: This is the amount of cash in a company, as well as all other investments that can be quickly turned into cash. It also includes any short-term investments that are equal to three months or less. You can find this information from a company’s balance sheet.
Example
Let’s say ABC Inc. has $100 million outstanding shares and its closing price per share is $20. So it’s market capitalization is ($100 million x $20) = $2 billion.
ABC Inc. also has a total debt of $30 million.
It also has Cash and Cash Equivalents of $500 million.
So ABC Inc.’s Enterprise Value is:
Enterprise value = $2 billion + $30 million – $500 million = $1.53 billion
Conclusion
Enterprise value is a measure of the total market value of an entire company. It takes debt and preferred equity into account when measuring this value. This number will help investors to assess the size and financial capability of a company.
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