Entering text into the input field will update the search result below

Enterprise Value: Definition & Formula

Updated: Oct. 18, 2022By: Richard Best

Investors and analysts who want a more comprehensive measure of a company's worth look at its enterprise value, which factors in more than just equity value. Enterprise value considers ownership interests, debt obligations, and cash holdings, and presents what the value of the underlying business itself is as driven by the market's valuation of shares.

Businessman analyzing report, business performance concept

stnazkul/iStock via Getty Images

What Is Enterprise Value?

Enterprise value (EV) is a way to measure the actual value of a company's business operations, without regard to its capital structure or cash on hand. It’s a more holistic way to value a company than by just looking at its market capitalization. Essentially, enterprise value is a company's market capitalization adjusted upwards for outstanding debt and adjusted downwards by its balance of cash & equivalents.

A company's enterprise value can increase or decrease based on its financial activities and its performance in the stock market. Enterprise value will move up and down in step with changes in a company's market capitalization, except where changes to cash and debt balances occur.

Uses for Enterprise Value

Because enterprise value is a more accurate measure of a company's actual business value, it is typically used to estimate its true takeover value. For example, if a company has a market cap of $22 billion, but holds $3 billion in cash, an acquirer who buys all outstanding shares at the current market price is essentially paying only $19 billion for the business. The acquirer will use $22 billion to purchase all the outstanding stock, but then inherit the $3 billion of the case.

Investors and analysts often use enterprise value to conduct comparisons of companies with varying capital structures. When combined with other financial metrics, such as EBITDA, revenues, and price/earnings, enterprise value ratios are used to measure and compare the financial performance of companies.

Key Takeaway: Enterprise value represents a company's worth more accurately than market capitalization because it accounts for its debt obligations and liquid assets.

Enterprise Value Formula

Enterprise value is relatively easy to calculate if you know where to find the variables. The formula for calculating EV is as follows:

Enterprise Value (EV) = Market Capitalization + Total Debt – Cash and Cash Equivalents

  • Market capitalization, also referred to as "market cap," is simply the number of outstanding shares multiplied by the most recent share price.
  • Total debt is the sum of all a company's short- and long-term debt and can be found on its balance sheet under "Liabilities."
  • Cash and cash equivalents include all the company's liquid assets listed under "Current Assets" on the balance sheet.

Seeking Alpha readers can find balance sheet information for individual companies by visiting the company stock page, and then selecting "Financials", then "Financial Statements", before then specifying "Balance Sheet" (see below). A company's Income Statement and Cash Flow statement are also available here.

Balance Sheet button on Seeking Alpha Symbol Page

Seeking Alpha Symbol Page

Key Takeaway: The enterprise value formula is straightforward with just three components: a company's market capitalization, total debt obligations, and liquid assets.

Debt's Impacts to a Company's Enterprise Value

A company's debt is added to market capitalization because it increases the amount that would have to be paid to acquire the company. For a company to be acquired, the investor or suitor would have to cover the debt obligations of the company in addition to buying its outstanding stock.

Similarly, cash is deducted from enterprise value because, in a takeover situation, a company relinquishes its cash to the buyer, effectively lowering the cost of acquisition.

Tip: A company's enterprise value is most often affected by changes in market capitalization. Debt issuances and debt repayments may not impact enterprise value at all, as the change in debt and change in cash can offset each other. A company's enterprise value will rise if cash from a new debt issuance is invested in the business.

Enterprise Value Calculation Example

For a clearer picture of how a company's enterprise value can change, consider the following example.

At the beginning of the year, Company A had $10 million in market capitalization, cash and cash equivalents of $400,000, and total debt of $500,000 for an enterprise value of $10.1 million.

$10 million + $500,000 debt - $400,000 cash = $10.1 million

By midyear, its share price had increased 5%, increasing its market cap to $10.5 million. The company decided to use $300,000 of its cash to pay down $300,000 of its debt. Its enterprise value at that point is $10.6 million.

$10.5 million + $200,000 debt - $100,000 cash = $10.6 million

EBITDA & Enterprise Value (EV)

Enterprise value is a common numerator used in many financial ratios to measure a company's performance relative to its total value. One of the more commonly used financial ratios is the Enterprise Value/EBITDA, which compares the total enterprise value of a company to its operating profits generated from earnings before interest, taxes, depreciation, and amortization (EBITDA).

EBITDA is a widely accepted way to measure the financial performance and profitability of companies regardless of capital structure.

The formula for calculating EBITDA is straightforward:

EBITDA = Net income + interest expense + taxes + depreciation + amortization

When used together as a financial ratio, EV/EBITDA become a useful valuation tool to compare the total value of a company to the company's cash earnings net of non-cash expenses. The ratio can be more useful than the price-earnings (P/E) ratio when comparing companies with varying amounts of debt. It's also an especially useful ratio when valuing capital-intensive companies with high levels of depreciation and amortization.

Key Takeaway: The EV / EBITDA ratio can be useful in comparing companies with varying amounts of debt.

Bottom Line

Enterprise value isn't followed as closely as market cap by most investors, yet is a useful measure that reflects the value of a company's underlying business. It measures the true cost an acquirer would be paying for the business if all common shares were purchased at the current stock price.

This article was written by

Richard Best profile picture
Thirty-plus years in the financial services industry as an advisor, managing director, directors of marketing and training, and currently as a consultant to the industry. Author and columnist on wealth management and investing topics.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (2)

Very interesting and precise, thank you! Can you please explain why and when a company would have a negative EV?
Mvhenderson4 profile picture
@nishant0ds A company can have a negative Enterprise Value (EV) under certain circumstances, typically when its market capitalization is less than its total debt and other obligations. EV is a measure of a company's total value, including both its equity and debt. It represents the theoretical takeover price for the company, assuming that the buyer would assume all of the company's debt.

There are a few reasons why a company may have a negative EV:

1. If a company has a significant amount of debt relative to its market capitalization, it can lead to a negative EV. This situation often arises when a company is highly leveraged and facing financial distress.

2. If a company's market capitalization declines significantly due to poor financial performance, market sentiment, or other factors, while its debt remains unchanged, the resulting EV may turn negative.

3.Companies that are in financial distress or bankruptcy proceedings may have negative EV. In these cases, the market value of the equity might be significantly eroded, and the company's debt obligations outweigh its remaining equity value.

It's important to note that a negative EV doesn't necessarily mean the company is inherently worthless or unviable. It reflects the current market perception of the company's financial health and can be influenced by various factors, including market conditions, industry trends, and management decisions.

When analyzing a company with a negative EV, it's crucial to dig deeper into its financial statements, debt structure, industry dynamics, and potential catalysts for a turnaround. Negative EV can sometimes present opportunities for investors or acquirers who believe the market has undervalued the company's assets or growth potential. However, investing in or acquiring companies with negative EV can be inherently risky and requires careful evaluation of the specific circumstances and potential risks involved. I hope this helps!
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.