Enterprise Value (EV)
Date created: Oct 12, 2022 • Last updated: Oct 12, 2022
What is Enterprise Value?
Enterprise Value a comprehensive measure of a company’s value. It is used for valuation of a company before takeover and is calculated by adding market cap with debt, net cash and cash equivalents.
Enterprise Value Formula
How to calculate Enterprise Value
If a company has $10M market cap, $300K debt, and $100K cash on hand, the Enterprise Value would be $10M + $300K -$100K, which is $10.2M. This means that in theory, the cost to acquire this company is $10.2M.
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How to visualize Enterprise Value?
Much like most other financial and valuation ratios, the best way to visualize Enterprise Value data is with a summary chart. The summary chart, also known as the metric view, displays the current value of your data and allows you to compare it with a previous time period. Check out the example:
Enterprise Value visualization example
ChartMeasuring Enterprise Value
More about Enterprise Value
Enterprise Value (EV) is an accurate calculation of a company’s economic value, based on market cap, debt, and cash. Market cap is calculated by multiple outstanding shares by share price. Debt, in this formula, refers to both short-term and long-term debt. Cash refers to all liquid assets of the company. Due to the formula taking debt and cash into consideration, EV is one of the more realistic measures of the minimum takeover price of a company.
The reason cash is removed from the equation is because in case of a takeover, the buyer would gain cash on hand, so this doesn’t truly add to cost of acquisition. For example, consider two companies A and B with the same market cap. The company with $10M debt and no cash would cost more to acquire that the company with no debt and $10M cash. In practice, EV is used in valuation ratios such as EV/EBITDA to compare a set of companies in an industry.