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:
- 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.
- 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.
- 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