Enterprise value (EV) is a measure of a company's total value, often described as the theoretical price to acquire the entire business. Unlike market capitalisation, which reflects only equity, EV captures the claims of all capital providers and is independent of how the firm is financed.

Formula

EV = Equity value + Total debt + Preferred stock + Minority interest − Cash & equivalents

In words: take the equity value (market capitalisation for a public company), add debt and other non-equity claims, and subtract cash. Cash is subtracted because an acquirer could use the target's own cash to help fund the purchase, effectively reducing the price.

Why subtract cash and add debt

When you buy a company you take on its debt (which must be repaid) and you gain its cash (which offsets the price). EV therefore reflects the value of the operating business, stripped of financing and surplus cash. This is what makes it the right numerator for multiples whose denominators are also pre-financing, such as EBITDA and EBIT.

Enterprise value versus equity value

Item Enterprise value Equity value
Whose claim All capital providers Shareholders only
Capital structure Independent of it Affected by leverage
Typical multiples EV/EBITDA, EV/EBIT, EV/Revenue P/E, P/B

Use in M&A

Enterprise value is the common currency of M&A valuation. It is the output of trading-multiple and precedent-transaction analyses and the headline result of a discounted cash flow. Analysts then bridge from enterprise value to the price paid to shareholders (equity value) by subtracting net debt and other claims.

See also

External resources

Practitioner guides from Main Street Wealth, an M&A advisory firm:

References & further reading

  1. Investopedia — “Enterprise Value (EV)”
  2. Wall Street Prep — “Enterprise Value vs. Equity Value”
Category: Valuation