What Is Enterprise Value (EV)?

Enterprise value (EV) measures a company’s total value. Its calculation includes not only the market capitalization of a company but also short-term and long-term debt, as well as any cash or cash equivalents on the company’s balance sheet. It is often used as a more comprehensive alternative to 澳洲幸运5开奖号码历史查询:market capitalization when valuing a company.

How Enterprise Value (EV) Works

Enterprise value (EV) differs significantly from simple market capitalization in several ways, and many consider it to be a m✨ore accurate representation of a firm’s value. E🧜V tells investors or interested parties a company’s value and how much another company would need if it wanted to purchase that company.

A company’s EV can be negative if the total value of its cash and cash equivalents surpasses that of the combined total of its market cap and debts. This is a sign th🤡at a company is not using its assets very well—it has too much cash sitting around not being used. Extra cash can be used for many things, such as distributions, buybacks, expansion, research and development, maintenance, employee pay raises, bonuses, or paying off debts.

Enterprise😼 value uses figures from a company’s financial statements and current market prices. The c✤omponents that make up EV are:

• Market cap: The total value of a company’s outstanding common and preferred shares
• Debt: The sum of long-term and short-term debt
• Preferred equity: Preferred shares of equity need to be included as well since they are claimed on the company's equity not included in market capitalization.
• Minority interest: The equity value of a subsidiary with less than 50% ownership
• 澳洲幸运5开奖号码历史查询:Cash and cash equivalents: The total amount of cash, certificates of deposit (CDs), drafts, money orders, commercial paper, marketable securities, money market funds, short-term government bonds, or Treasury bills that a company possesses

Formula and Calculation

Enterprise value is the sum of a company's market capitalization and any debts, minus cash or cash equivalents on hand.

$\begin{aligned} &EV=MC+Total~Debt-C\\ &\textbf{where:}\\ &MC=\text{\small Market capitalization; equal to the current stock}\\ &\text{\small price multiplied by the number of outstanding stock shares}\\ &Total~debt =\text{\small Equal to the sum of short-term and}\\ &\text{\small long-term debt}\\ &C=\text{\small Cash and cash equivalents; the liquid assets of}\\ &\text{\small a company, but may not include marketable securities}\\ \end{aligned}$​EV=MC+Total Debt−Cwhere:MC=Marke❀t capitalization; equal&🌞nbsp;to the current stockprice 🤪;multiplied by the number of ou🔴tstanding stock sharesTotal debt=Equal&🍌nbsp;to the sum of short-ter𒉰m andlong-term debtC=Cash and cash equivalents;🅰 the liquid assets ofa company, but may noꦗt include marketable securities​

To calculate market capitalization—if not readily available online—you would multiply the number of outstanding shares by the current stock price. Next, total all debt on the company’s balance sheet, including both short-term and long-term debt. Finally, add the market capitalization to the total debt and subtract any cash and cash equivalents from the result.

Financial Ratios That Use Enterprise Value

Enterprise value is used as the basis for many financial ratios that measure the performance of a company. For example, the 澳洲幸运5开奖号码历史查询:enterprise multiple contains enterprise value. It relates the total value of a company from al🧸l sources to the earnings before interest, ta🅠xes, depreciation, and amortization (EBITDA).

EBITDA measures a company’s ability to generate revenue and is used as an alternative to simple earnings or net income in some circumstances. It is usually positiꦛve even when earnings per share (EPS) is not.

EBITDA, however, can be misleading because it strips out the cost of capital investments꧂ like property, plant, and equipment. Another figure, EBIT, can be used as a similar financial metric without the drawback of removing depreciation and amortization expenses related to proper𓂃ty, plant, and equipment (PP&E).

Enterprise Multiple (EV/EBITDA Ratio)

The enterprise multiple (EV/EBITDA) metric is used as a valuation tool to compare the value of a company and its debt to the company’s cash ea🅘rnings, less its non-cash expenses. As a res𒁏ult, it’s ideal for analysts and investors looking to compare companies within the same industry.

The enterprise multiple is useful when:

• Comparing firms with different 澳洲幸运5开奖号码历史查询:degrees of financi🐲al leverage (DFLs🐻)
• Valuing capital-intensive businesses with high levels of depreciation and amortization
  

However, the enterprise multiple also has a few drawbacks. If 澳洲幸运5开奖号码历史查询:working capital is growing, EBITDA will overstate cash flows from operations (CFO or OCF). Further, this measure ignores how different ♌revenue recognition policies can affect a company’s OCF.

Because free cash flow to the firm captures the number of 澳洲幸运5开奖号码历史查询:capital expenditures (CapEx), it is more strongly linked with valuation theory than EBITDA. EBITDA will be a generally adequate measure if&nbs💝p;capital expenses equal💯 depreciation expenses.

EV/Sales Ratio

Another commonly used multiple for determining the relative value of firms is the enterprise value-to-sales ratio, or EV/sales. EV/sales is regarded as a more accurate measure than the price/sales ratio since it considers the value and amount of debt that a company must repay at som♓e point.

A company with a lower EV/sales multiple is often seen as more undervalued and therefore more attr🔯active. The EV/sales ratio can be negative when the cash held by a company is more than the market capitalization and debt value. A negative EV/sales implies that a company can pay off all of its debts.

Enterprise Value vs. Market Cap

Why doesn’t market capitalization properly represent a firm’s value? It leaves a lot of essential factors out, such as a company’s debt and cash reserves. Enterprise value is a modification of market cap, as it incorporates debt and cash for determining a comꩵpany’s value.

Imagine two identical widget manufacturers, Company A a🌞nd Company B, have the same stock price of $🏅4.32 per share. Each has 1 million outstanding shares with a market cap of $4.32 million.

Now, imagine Company A has $500,000 in cash an🐲d cash equivalents and $250,000 in total debt. Its EV 🧸(total worth) is:

($4.32 per share x 1 million shares) + $250,000 - $500,000 = $4.07 million

Company B, on the other hand, has $1 million in♍ cash and $250,000 in debt. Its EV is:

($4.32 per share x 1 million shares) + $250,000 - $1,000,000 = $3.57 million

The companies looked identi𒊎cal when using just their market capitalization. However, once tꦍhe EV takes into account both debt and cash, the value of Company A is significantly higher.

EV vs. P/E Ratio

The price-to-earnings ratio (P/E ratio) is a ratio for valuing a company that measures its current share price relative to its 澳洲幸运5开奖号码历史查询:earnings per share (EPS). The price-to-earninღgs ratio is sometimes known as the price multiple or the earnings&nbsꦓp;multiple.

The P/E ratio doesn’t consider the amount of debt that a company has on its balance sheet. EV includes debt whꦉen valuing a company and is often used in tandem with the P/E ratio to achieve a comprehensive valuation.

Limitations of EV

EV includes total debt, so it’s essential to consider how management utilizes that debt when valuing a company. For example, capital-intensive industries such as the oil and gas industry typicꦜally carry significant amounts of debt, which is used to foster growth in ways l🤪ike purchasing a plant and equipment.

In a less capital-intensive industry, however, high levels of debt could indicate that a company is unable to generate enough revenue to coꦅver the costs of basic operations. As a result, the EV can be skewed when comparing companies across industries.

If the company being looked at is undergoing a merger or acquisition, the acquiring compan🧸y will need to account for the amount of debt it is taking on in the merger. Investors 🎶can use this information to evaluate what the merged companies will look like in the future.

As with any financial metric, it’s best to compare companies within the same industry to better understand how the🅺 company is valued relative to its peers.

Example of Enterprise Value

The formula for EV is the sum of the market value of equity (market capital🐟ization) and the market value 🉐of a company’s debt, less any cash. A company’s market capitalization is calculated by multiplying the share price by the number of outstanding shares.

The net debt is the market value of debt minus cash. A company acquiring another company keeps the cash of the target firm, which is why cash needs to be deducted from the fir𒐪m’s price as represented by the market cap.

Let’s calculate the enterprise value for Macy’s (M), using data from their Form 10-K.

For its ✱2023 fiscal year, Macy’s recorded the ♌following:

We can calculate Macy’s market cap at the time from the information above. Macy’s had 274.3 million outstanding shares valued at $18.64 per share at the end of its 2023 fiscal year (Feb. 3, 2024).

• Macy’s market capitalization was $5.13 billion (274.3 million × $18.64).
• Macy’s had short-term debt of $0 and long-term debt of $2.998 billion, for a total debt of $2.998 billion.
• Macy’s had $1.03 billion in cash and cash equivalents.

Macy’s Enterprise Value = $5.13 billion + $2.998 billion - $1.03 billion

Macy’s EV = $7.098 billion

Enterprise value is considered comprehensive when valuing a company because anyone purchasing Macy’s outstanding shares for its then market capitalization of $5.13 billion would also have to settle the $2.998 billion in outstanding debts that Macy's had at that time.

In total, the 澳洲幸运5开奖号码历史查询:acquiring company would have to spend more than $8 billion to purchase Macy’s. However, since Macy’s has $1.03 billion in cash, this amount could be added to repay the debt. This lowers the total needed to purchase Macy's at the end of their fiscal year 2023 to just over $7 billio𒈔n.

The Bottom Line

Enterprise value estimates a company’s total value, including debt and cash. It is generally used by companies when considering a merger or acquisition. Investors can also use EV to estimate a company’s size and worth to help them evaluate their stock choices. EV is best used with other metrics for valuing a stock. Some popular ratios are EV/sales and EV/EBITDA.