About Enterprise Value

Listen to About Enterprise Value


Enterprise value (EV) measures a company’s total value, often used as a more comprehensive alternative to equity market capitalization. Whereas market capitalization only reflects the value of a company’s equity (e.g., common stock), enterprise value considers a company’s debt and equity. The formula for calculating enterprise value is:

EV = Market capitalization + Debt – Cash and Cash Equivalents

In other words, enterprise value equals a company’s outstanding stock plus its debt minus any cash and cash equivalents the company holds. This is because the cash and cash equivalents a company has can be used to pay off its debt, so they are considered when determining its total value.

Several methods can be used to determine the value of a company’s equity, debt, cash, and cash equivalents. These include:

  1. Fundamental analysis: This method involves analyzing a company’s financial statements and other financial information to determine its intrinsic value. This can include analyzing metrics such as revenue, earnings, and cash flow and considering industry and economic conditions.
  2. Comparable company analysis: This method involves comparing a company’s financial metrics to those of similar companies in the same industry. This can help determine a company’s relative value compared to its peers.
  3. Discounted cash flow (DCF) analysis: This method involves projecting the future cash flows of a company and discounting them back to their present value. This can determine the intrinsic value of a company’s equity.

Ultimately, the choice of which method to use will depend on the specific circumstances and goals of the analysis.

Author, Rune Holsvik