Enterprise value, often shortened to EV, is a form of business valuation used in mergers and acquisitions (M&A). Calculating EV involves adding together a company’s market capitalization (how much its publicly traded shares are worth) and total debt minus any highly-liquid assets, like cash or savings.
In this guide, we’ll go over:
- Enterprise Value Definition
- How to Calculate Enterprise Value
- Enterprise Value in Practice
- Showing You Understand EV on Resumes
- Related Skills for Finance Careers
Enterprise Value Definition
Enterprise value (EV) is a form of business valuation or a way to determine how much a company is worth. Some forms of business valuation focus on profitability or how well the company can produce future returns for investors. EV, on the other hand, explains how much a business is worth in terms of purchase price. Essentially, if you wanted to buy a public company, you would need to pay off all the company’s debts and buy out all the current shareholders — enterprise value shows how much that would cost.
This business valuation method is especially useful for comparing companies with different capital structures or ratios of debt to equity. Calculating EV involves adding the company’s total debt and equity, so companies with different debt-to-equity ratios can be compared on more even ground.
Who Uses Enterprise Value?
Enterprise value is a key valuation method in mergers and acquisitions. In M&A, investment bankers compare companies to help their clients decide if buying or merging with another company is beneficial.
However, EV is also a metric used in other calculations and formulas throughout corporate finance and accounting. For example, enterprise value is used in ratios against things like EBITDA (earnings before interest, taxes, depreciation, and amortization) to create a relative value used to compare companies in a slightly different context.
>>MORE: Learn more about mergers and acquisitions with HSBC’s Global Banking & Markets Virtual Experience Program.
How to Calculate Enterprise Value
The enterprise value calculation involves subtracting the company’s cash or liquid assets (not including stocks or other securities) from the sum of its total debt and market capitalization.
Enterprise Value Formula
EV = Market Cap + Total Debt – Cash
Components of EV Calculation
Market Cap
Market cap, or market capitalization, is the current market value of the company’s outstanding shares or the number of shares the company has sold to shareholders. Sometimes called equity value, market capitalization is the total number of shares multiplied by the current share price on the market. This metric judges how big a company is — the higher the market cap, the bigger the company.
Total Debt
A company’s total debt is all the money it owes to lenders or creditors. This includes both short- and long-term debt. Debt can also be called liabilities — money the company owes to other people.
Cash
Cash is the company’s liquid assets, such as paper currency, savings, and checking accounts. This does not include marketable securities like stocks, even though those are liquid assets, because the value of the stocks is a part of market capitalization or equity value.
When we subtract cash from the company’s total debt, we get net debt — if you buy the company and inherit its liquid assets, the cash and liquid assets can offset some of the total debt, leaving only the company’s net debt.
>>MORE: Learn real-world banking skills with the TD Securities Investment Banking Virtual Experience Program.
Example Enterprise Value Calculation
Enterprise value constantly changes because stock prices fluctuate, meaning a company’s market cap and EV at 10 a.m. may be different at 4 p.m. To better understand how to calculate enterprise value, let’s make an imaginary company. From the company’s balance sheet and current market information, we can get the following details:
- Cash on hand: $15,000
- Total amount in savings and checking accounts: $100,000
- Inventory value: $75,000
- Accounts receivable: $10,000
- Long-term debts: $250,000
- Short-term debts: $30,000
- Accounts payable: $10,000
- Outstanding shares: 5,000
- Cost per share: $4.37
So, we need to group these things into the corresponding parts of the enterprise value formula: market cap, total debt, and cash.
Cash is the total of this company’s liquid assets, so that includes accounts receivable (money other people owe the company), inventory, checking accounts, savings accounts, and physical cash.
The company’s total cash is: $200,000
Total debt includes long- and short-term debts and accounts payable (money the company owes to others).
The company’s total debt is: $290,000
To determine our company’s market capitalization, we need to multiply the number of shares by the cost per share.
Our company’s market capitalization is: $21,850
Putting that all into the enterprise value formula, we have:
EV = $21,850 (market cap) + $290,000 (debt) – $200,000 (cash)
Our company’s EV is: $111,850
>>MORE: Learn more valuation methods with JPMorgan Chase’s Investment Banking Virtual Experience Program.
Enterprise Value in Practice
While EV does give us an idea of how much a company would cost to purchase, it’s also a crucial metric in other calculations concerning profitability, financial performance, and business valuation.
For example, one form of comparable company analysis uses a ratio of enterprise value to EBITDA (earnings before interest, taxes, depreciation, and amortization) that compares a company’s equity and debt (EV) to its general profitability (EBITDA). This ratio is useful for comparing companies of varying sizes or across different states since EBITDA removes the variable of state tax rates.
You can also compare EV to a company’s revenue — the EV/Revenue ratio. This ratio is primarily used for companies that do not have a positive EBITDA (due to low cash flows), such as early-stage or high-growth companies that aren’t profitable yet.
EV Limitations
Enterprise value does have some limitations, though. Ultimately, EV only tells us how much a company would cost to buy outright, but that can be slightly misleading. For example, some industries typically operate with a lot of debt like oil and gas companies. So, EV may not be the best option when comparing companies in varying industries.
Additionally, EV shows how much it would cost to buy a company in theory. But in reality, there is usually a premium to buy a company, especially if it’s profitable and showing signs of growth. So in many ways, a company’s EV is just the bare minimum you’d need to spend.
Lastly, calculating enterprise value can be tricky. While market capitalization is accessible information, debt is not always as well-reported.
Find your career fit
Discover if this is the right career path for you with a free Forage job simulation.
Showing You Understand EV on Resumes
As a type of business valuation, there are two key places you can mention enterprise value on your resume:
- Skills Section: In your skills section, you can note that you’re familiar with business valuation methods, such as enterprise value, comparable company analysis, and discounted cash flow (DCF) valuation.
- Description for Work or Internship: If you used EV in prior work or internship experiences, mention that in the job description. For example, you could say: I compared and analyzed four different companies using various valuation methods, including EV and DCF valuation.
If you don’t have prior work or internship experience, you can use your cover letter to talk about any personal experience using EV. For example, you could mention if you completed a large project in a course that focused on comparing companies using EV and other valuation tactics.
Related Skills for Finance Careers
Careers in finance use many different methods to compare, rank, and analyze companies and investment options. Some specific metrics, ratios, and calculations finance professionals should be familiar with are:
- Calculating net present value
- Measuring profit margins
- Determining an investment’s compound annual growth rate (CAGR)
- Understanding how to use the price-to-earnings (P/E) ratio
Start learning the skills you need for a career in finance with Forage’s finance virtual experience programs.
Image credit: Canva
