Updated on March 8, 2023
Enterprise Value or EV refers to the total value of a company including common shareholders, preferred shareholders and its lenders. EV is the corporate valuation of the company and is calculated by using market capitalization and company’s total debt. The market cap used for determining EV includes preference shares, common stock and minority shareholder interest. Total debt comprises both short-term and long-term liabilities of the company.
Calculation of Enterprise Value
EV is computed using the following formula
EV = Market Capitalization + Market Value of Debt – Cash and Equivalents.
Market Cap in EV is a detailed brekup, as:
EV = (Common Shares + Preferred Shares + Market Value of Debt + Minority Interest) – Cash and Equivalents
Benefits of Enterprise Value
Some benefits of using Enterprise Value are:
a) It is considered as a more accurate measure of a company’s valuation.
b) It includes the entire market value instead of only the equity value.
c) It is specifically used during merger & acquisition deals.
d) It is the ‘minimum value’ that a company would pay for buying a company.