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A Quick Look at Enterprise Value



What is Enterprise Value?


Enterprise Value is the total value of a business, taking into account not just its equity, but also its debt, and excluding its cash and cash equivalents



So Enterprise Value (for public companies) is equal to…


+ MARKET CAPITALIZATION

+ TOTAL DEBT

– CASH & CASH EQUIVALENTS



To find out a private company’s Enterprise Value:


1. Guess its future sales (Revenue)

2. Estimate the Enterprise Value to the sales Ratio (EV/Revenue), for example looking at industry peers

3. To be more accurate, apply the Discounted Cash Flow Method



Why does it matter?


✦ it goes beyond just stock price

✦ it provides a more comprehensive view

✦ Important for M&As, Valuations, and Financial Analysis


Components of EV

✦ Market Capitalization: Total market value of a company’s outstanding shares

✦ Debt: Long-term and short-term obligations

✦ Cash and equivalents: Highly liquid assets


How to Calculate EV

1. Find the market capitalization (usually available on financial news websites)

2. Add total debt (Found in the balance sheet)

3. Subtract cash and cash equivalents (Also in the balance sheet)


DO YOU WANT TO KNOW MORE?

CHECK OUT OUR FREE GUIDES IN THE BOOKS PAGE!




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