What Is Enterprise Value (EV)?
Enterprise value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market capitalization. EV includes in its calculation the market capitalization of a company but also short-term and long-term debt as well as any cash on the company's balance sheet. Enterprise value is a popular metric used to value a company for a potential takeover.
Formula for EV
EV=MC+Total debt−Cwhere:MC=Market capitalization; equal to the current stockprice multiplied by the number of outstanding stock sharesTotal debt=Equal to the sum of short-term andlong-term debtC=Cash and cash equivalents; the liquid assets ofa company, but may not include marketable securities \begin{aligned} &EV = MC + \textit{Total debt} - C \\ &\textbf{where:}\\ &MC=\text{\small Market capitalization; equal to the current stock}\\ &\text{\small price multiplied by the number of outstanding stock shares}\\ &\textit{Total debt}=\text{\small Equal to the sum of short-term and}\\ &\text{\small long-term debt}\\ &C = \text{\small Cash and cash equivalents; the liquid assets of}\\ &\text{\small a company, but may not include marketable securities }\\ \end{aligned}EV=MC+Total debt−Cwhere:MC=Market capitalization; equal to the current stockprice multiplied by the number of outstanding stock sharesTotal debt=Equal to the sum of short-term andlong-term debtC=Cash and cash equivalents; the liquid assets ofa company, but may not include marketable securities
How to Calculate EV
1.Calculate the market capitalization if not readily available by multiplying the number of outstanding shares by the current stock price.
2.Total all debt on the company's balance sheet including both short-term and long-term debt.
3.Add the market capitalization to the total debt and subtract any cash and cash equivalents from the result.
