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Enterprise Value

Definition

Enterprise value, total enterprise value, or firm value is an economic measure reflecting the market value of a business. It is a sum of claims by all claimants: creditors and shareholders. Enterprise value is one of the fundamental metrics used in business valuation, financial modeling, accounting, portfolio analysis, and risk analysis.

Enterprise Value, or EV as it is more popularly known, is a measurement of a company's total value.

EV is usually used because it is a more wide-ranging substitute to equity market capitalization. The overall market capitalization of a company can simplistically be described in the equation (Sp x S) where Sp is the share price multiplied by the number of total outstanding shares of a company.

Enterprise value (EV) is determined as market capitalization with the addition of minority interest, debt as well as preferred shares, from which are subtracted total cash and all other cash equivalents.

EV Equation

Therefore the EV equation may be defined as:

EV = market value of common stock + market value of preferred equity + market value of debt + minority interest - cash and investments.

EV usage

It is used by and large to determine the overall market value of a company and is also widely considered to be a (theoretical) market price of a company. In the event of an acquisition or even a hostile takeover, the purchaser would always determine the EV before making his/her bid. In fact Enterprise Value is one of the most primary metrics used in risk analysis, business valuation, financial modeling, portfolio analysis along with a veritable host of other real world financial applications.

An easy way to understand Enterprise valuation is to consider the purchase of an entire corporation. Quite simply EV is what a person or a corporate entity will have to pay when they purchase a company.

EV is said to be in the negative if the concerned may hold very high amounts of cash without those liquid assets being reflected in the market value of the shares themselves. This is because liquid cash is deducted since it tends to reduce the total net cost to any potential buyer. Here it is immaterial whether the cash is used to pay debts or issue dividends to the share holders.

Essential considerations

When determining EV many essential financial considerations should be included such as environmental provisions. Abandonment provisions, Employee stock options, pension liabilities and so on and so forth since they do have claims on the worth and assets of the company.


Further Reading


An Empirical Study on Relation of Corporate Governance and Enterprise Value [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-GGYY200404014.htm'>PDF]
… Methodology for Assessing the Value of an Enterprise in the Depressed Sector of Economy … Ismanov IN, Salimov GK Issues of improving the value of industrial enterprises // Scientific e … Navoi, 2005, p.132., Khodiev B., Berkinov B., Kravchenko A. Business valuation.- T .: IQTISOD …

Study on relation of internal control and enterprise value: an empirical analysis from Shanghai and Shenzhen stock marketsStudy on relation of internal control and enterprise value: an empirical analysis from Shanghai and Shenzhen stock markets
en.cnki.com.cn [PDF]
… Methodology for Assessing the Value of an Enterprise in the Depressed Sector of Economy … Ismanov IN, Salimov GK Issues of improving the value of industrial enterprises // Scientific e … Navoi, 2005, p.132., Khodiev B., Berkinov B., Kravchenko A. Business valuation.- T .: IQTISOD …

Added value, enterprise value and competitive advantageAdded value, enterprise value and competitive advantage
www.emerald.com [PDF]
… Methodology for Assessing the Value of an Enterprise in the Depressed Sector of Economy … Ismanov IN, Salimov GK Issues of improving the value of industrial enterprises // Scientific e … Navoi, 2005, p.132., Khodiev B., Berkinov B., Kravchenko A. Business valuation.- T .: IQTISOD …

The enterprise performance evaluation for maximizing the enterprise value based on stakeholder theory <span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-KJYJ200603008.htm' />The enterprise performance evaluation for maximizing the enterprise value based on stakeholder theory [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-KJYJ200603008.htm'>PDF]
… Methodology for Assessing the Value of an Enterprise in the Depressed Sector of Economy … Ismanov IN, Salimov GK Issues of improving the value of industrial enterprises // Scientific e … Navoi, 2005, p.132., Khodiev B., Berkinov B., Kravchenko A. Business valuation.- T .: IQTISOD …

The choice of methodological approaches to the estimation of enterprise value in terms of management system goalsThe choice of methodological approaches to the estimation of enterprise value in terms of management system goals
search.proquest.com [PDF]
… Methodology for Assessing the Value of an Enterprise in the Depressed Sector of Economy … Ismanov IN, Salimov GK Issues of improving the value of industrial enterprises // Scientific e … Navoi, 2005, p.132., Khodiev B., Berkinov B., Kravchenko A. Business valuation.- T .: IQTISOD …

Studies on the Enterprise Value Network Based on Modularity and Its Competence <span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-ZYCY200707011.htm' />Studies on the Enterprise Value Network Based on Modularity and Its Competence [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-ZYCY200707011.htm'>PDF]
… Methodology for Assessing the Value of an Enterprise in the Depressed Sector of Economy … Ismanov IN, Salimov GK Issues of improving the value of industrial enterprises // Scientific e … Navoi, 2005, p.132., Khodiev B., Berkinov B., Kravchenko A. Business valuation.- T .: IQTISOD …

Research on Enterprise Value Reporting and Wealth Change Reporting <span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-KJYJ200305003.htm' />Research on Enterprise Value Reporting and Wealth Change Reporting [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-KJYJ200305003.htm'>PDF]
… Methodology for Assessing the Value of an Enterprise in the Depressed Sector of Economy … Ismanov IN, Salimov GK Issues of improving the value of industrial enterprises // Scientific e … Navoi, 2005, p.132., Khodiev B., Berkinov B., Kravchenko A. Business valuation.- T .: IQTISOD …

Free cash flow, enterprise value, and investor cautionFree cash flow, enterprise value, and investor caution
jpe.pm-research.com [PDF]
… Methodology for Assessing the Value of an Enterprise in the Depressed Sector of Economy … Ismanov IN, Salimov GK Issues of improving the value of industrial enterprises // Scientific e … Navoi, 2005, p.132., Khodiev B., Berkinov B., Kravchenko A. Business valuation.- T .: IQTISOD …

Strategic fit: Key to growing enterprise value through organizational capitalStrategic fit: Key to growing enterprise value through organizational capital
www.sciencedirect.com [PDF]
… Methodology for Assessing the Value of an Enterprise in the Depressed Sector of Economy … Ismanov IN, Salimov GK Issues of improving the value of industrial enterprises // Scientific e … Navoi, 2005, p.132., Khodiev B., Berkinov B., Kravchenko A. Business valuation.- T .: IQTISOD …



Q&A About Enterprise Value


How does EV differ from market capitalization?

Market capitalization can be described as the share price multiplied by the number of outstanding shares.

How does EV differ from Market Capitalization?

Market capitalization only reflects common equity.

What is Enterprise Value?

Enterprise value is a measurement of a company's total value.

Why do you need to know enterprise value?

You need to know enterprise value in order to determine the overall market price of a company.

Why do investors use EV instead of Market Capitalization?

Because it takes into account debt and preferred stock, which are not reflected in market capitalization.

What are some factors that affect enterprise value?

Factors that affect enterprise value include cash, debt and preferred equity.

What is the formula for calculating EV?

The formula for calculating enterprise value is as follows (where EBITDA stands for earnings before interest, taxes, depreciation and amortization):