Enterprise Value (EV) is a metric used to measure the acquisition cost of a publicly traded company, representing the total value of the company. It takes into account both the company’s equity (ownership) and its debt.
Enterprise Value is different from Market Capitalization. To calculate a company’s Enterprise Value, you add the company’s Market Cap to its total debt and then subtract its cash and cash equivalents.
Enterprise Value is often used in mergers and acquisitions, where the acquiring party uses it to assess the potential returns from acquiring the company.
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How to calculate Enterprise Value?
The formula for calculating Enterprise Value is as follows:
EV = Market Cap + Total Debt – Cash and Cash Equivalents
Where:
- Market Capitalization is the total market value of a company’s outstanding shares, calculated by multiplying the current stock price by the number of outstanding shares. It reflects the market’s assessment of the company’s equity value.
- Total Debt includes both short-term and long-term debt obligations of the company. This represents the company’s total debt, with creditors having priority claims over these debts. Information about short-term and long-term debt can be found on the company’s balance sheet.
- Cash and Cash Equivalents refer to the liquid assets that the company holds, such as cash on hand, and assets that can be quickly converted into cash, like marketable securities. Since cash can be used to pay down debt, it is subtracted from the EV calculation. It’s important to note that when calculating EV, marketable securities listed on the balance sheet should also be included in cash and cash equivalents.
In some cases, if a company has issued preferred stock or has minority interests, these should also be factored into the Enterprise Value calculation.
Therefore, the adjusted formula for calculating Enterprise Value is as follows:
EV = Market Cap + Total Debt + Preferred Stock Equity + Minority Interest – Cash and Cash Equivalents
Where:
- Preferred stock equity is added to the EV calculation because preferred shareholders have a higher claim on the company’s assets than common shareholders in the event of liquidation.
- Minority Interest reflects the equity ownership of minority shareholders in subsidiaries that are not wholly owned by the company. This value is included in the EV calculation because it represents part of the company’s overall assets.
How to Calculate the EV of a Public Company?
This section will provide an example calculation using Apple’s financial report released in September 2023:
From the balance sheet in Apple’s financial report, we can find information such as cash and cash equivalents, short-term debt, and long-term debt:
- Cash and cash equivalents: $29,965 million
- Marketable securities: $31,590 million
- Short-term debt: $9,822 million
- Long-term debt: $95,281 million.
So,
- Total Debt = Short-term Debt + Long-term Debt = $105,103 million
- Total cash and cash equivalents = $29,965 million + $31,590 million = $61,555 million
You can find Apple’s closing stock price as of the end of September 2023, which was $171.21, on the following website:
Additionally, from the financial report linked below, you can find Apple’s weighted average diluted shares, which totaled 15,812,547 thousand shares.
Therefore, Apple’s current Enterprise Value (EV) is calculated as follows:
EV = Market Cap + Total Debt – Cash and Cash Equivalents
= 15,744,231 thousand shares x $ 171.21 + $105,103 million – $61,555 million
= $2,739,118 million
So, Apple’s current enterprise value is $27.4 billion.
What is the Significance of Enterprise Value?
Enterprise value provides a comprehensive reflection of a company’s total value, considering all components of the capital structure, including equity, debt, and cash or cash equivalents.
Compared to market capitalization (which only reflects equity value), enterprise value offers a more complete view of a company’s overall worth.
In mergers and acquisitions (M&A) transactions, Enterprise Value is a critical reference point. It represents the actual amount a potential acquirer would need to pay, including taking on the target company’s debt, rather than just the shareholders’ equity value.
Therefore, it is considered a better indicator for assessing a company’s acquisition price since the acquirer typically assumes the target company’s debt and cash.
Additionally, enterprise value is often used alongside Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) or Earnings Before Interest and Taxes (EBIT) to value a company.
Enterprise Multiple
Enterprise Multiple, often abbreviated as EV/EBITDA, is the ratio of enterprise value (EV) to Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).
EBITDA is calculated as the sum of a company’s net profit, interest, taxes, depreciation and amortization, which is:
EBITDA = Net Profit + Interest + Taxes + Depreciation & Amortization
The EV/EBITDA ratio can be used to evaluate whether a company is overvalued or undervalued.
A lower ratio suggests that the enterprise value is underestimated, while a higher ratio indicates it may be overestimated.
EV/EBIT
EV/EBIT is a variation of the enterprise value multiple. Unlike the EV/EBITDA ratio, the EV/EBIT calculation includes depreciation and amortization.
Earnings Before Interest and Taxes (EBIT) represents the profit before deducting taxes and interest, which is:
EBIT = Net Profit + Interest + Taxes
The EV/EBIT ratio can also be used to gauge whether a company’s stock price is overvalued or undervalued compared to industry peers.
A lower ratio indicates that the stock price may be undervalued, while a higher ratio suggests it could be overvalued.
Moreover, the EV/EBIT ratio is particularly useful for capital-intensive companies where depreciation and amortization constitute a significant portion of economic costs.
Enterprise Value vs Market Cap?
| Enterprise Value | Market Cap |
|---|---|
Market Capitalization + Total Debt + Preferred Equity + Minority Interest – Cash and Cash Equivalents | Market Capitalization |
| It is used to evaluate the funds required to acquire a publicly traded company. | It serves as an indicator of the total value of a company’s stock. |
More Guides
- What Are Non-Controlling Interests?
- What is Shareholders’ Equity?
- What is a Company’s Preferred Stock?
- What is Enterprise Value?
- What is the Profit Margin and how to calculate it?
- What is Earnings Per Share? Basic EPS vs Diluted EPS
- What is Market Capitalization?
- What is Gross Profit, Operating Profit, and Net Profit?
- What is the P/S Ratio? How to use it?
- What is the P/E Ratio? And How to use it?