Enterprise Value (EV)

Loading the player...

What is the 'Enterprise Value (EV)'

Enterprise Value, or EV for short, is a measure of a company's total value, often used as a more comprehensive alternative to equity market capitalization. The market capitalization of a company is simply its share price multiplied by the number of shares a company has outstanding. Enterprise value is calculated as the market capitalization plus debt, minority interest and preferred shares, minus total cash and cash equivalents. Often times, the minority interest and preferred equity is effectively zero, although this need not be the case.

  • EV = market value of common stock + market value of preferred equity + market value of debt + minority interest - cash and investments.

BREAKING DOWN 'Enterprise Value (EV)'

Enterprise value can be thought of as the theoretical takeover price if the company were to bought. In the event of such a buyout, an acquirer would generally have to take on the company's debt, but would pocket its cash for itself. EV differs significantly from simple market capitalization in several ways, and many consider it to be a more accurate representation of a firm's value.

The value of a firm's debt, for example, would need to be paid by the buyer when taking over a company, thus enterprise value provides a much more accurate takeover valuation because it includes debt in its value calculation.

Enterprise Value As an Enterprise Multiple

Enterprise multiples that contain enterprise value relate the total value of a company as reflected in the market value of its capital from all sources to a measure of operating earnings generated, such as EBITDA.

  • EBITDA = recurring earnings from continuing operations + interest + taxes + depreciation + amortization

The Enterprise Value/EBITDA multiple is positively related to the growth rate in free cash flow to the firm (FCFF) and negatively related to the firm's overall risk level and weighted average cost of capital (WACC).

EV/EBITDA is useful in a number of situations:

  • The ratio may be more useful than the P/E ratio when comparing firms with different degrees of financial leverage (DFL).
  • EBITDA is useful for valuing capital-intensive businesses with high levels of depreciation and amortization.
  • EBITDA is usually positive even when earnings per share (EPS) is not.

EV/EBITDA also has a number of drawbacks, however:

  • If 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 CFO.
  • Because free cash flow to the firm captures the amount of capital expenditures (CapEx), it is more strongly linked with valuation theory than EBITDA. EBITDA will be a generally adequate measure if capital expenses equal depreciation expenses.

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 takes into account the value and amount of debt a company has, which needs to be paid back at some point. Generally the lower the EV/sales multiple the more attractive or undervalued the company is believed to be. The EV/sales ratio can actually be negative at times when the cash held by a company is more than the market capitalization and debt value, implying that the company can essentially be by itself with its own cash. 

 

RELATED TERMS
  1. Enterprise-Value-To-Sales - EV/Sales

    A valuation measure that compares the enterprise value of a company ...
  2. Enterprise Multiple

    A ratio used to determine the value of a company. The enterprise ...
  3. Net Debt To EBITDA Ratio

    A measurement of leverage, calculated as a company's interest-bearing ...
  4. Multiple

    A term that measures some aspect of a company's financial well-being, ...
  5. Relative Value

    A method of determining an asset's value that takes into account ...
  6. Market Value

    The price an asset would fetch in the marketplace. Market value ...
Related Articles
  1. Fundamental Analysis

    Explaining Enterprise Multiple

    The enterprise multiple is a ratio used to value a company as if it was going to be acquired.
  2. Fundamental Analysis

    The Difference Between Enterprise Value and Equity Value

    Enterprise value calculates a business’s current value, while equity value offers a snapshot of that business’s current and potential future value.
  3. Fundamental Analysis

    Using Enterprise Value To Compare Companies

    Learn how enterprise value can help investors compare companies with different capital structures.
  4. Markets

    Introduction To Enterprise Value

    Learn how enterprise value can help investors compare companies with different capital structures.
  5. Markets

    A Clear Look At EBITDA

    This measure has its benefits, but it can also present earnings through rose-colored glasses.
  6. Personal Finance

    Target Corp: WACC Analysis (TGT)

    Learn about the importance of capital structure when making investment decisions, and how Target's capital structure compares against the rest of the industry.
  7. Investing

    5 Common Trading Multiples Used In Oil And Gas Valuation

    Before you decide to invest in oil and gas, you should understand these multiples.
  8. Investing

    Free Cash Flow vs EBITDA: Which Should You Analyze?

    FCF and EBITDA are two ways of looking at the earnings of a business. EBITDA might be better for comparison purposes, while FCF is good for valuation.
  9. Options & Futures

    EBITDA: Challenging The Calculation

    This measure has a bad rap, but it's still a valuable tool when used appropriately.
  10. Professionals

    Top Things To Know For An Investment Banking Interview

    Without some basic knowledge, you won't get the job. Find out what you need to know and how to prepare.
RELATED FAQS
  1. How is it possible for a company to have a negative enterprise value?

    Learn about enterprise value and how value investors use it to find good companies with undervalued stocks. Negative enterprise ... Read Answer >>
  2. What is the difference between enterprise value and equity value?

    Valuating a business accurately depends heavily on the purpose of the valuation. Learn how enterprise value and equity value ... Read Answer >>
  3. How can I find a company's EV/EBITDA multiple?

    Learn what the EV/EBITDA equity valuation metric is, how it is calculated and what information investors and analysts obtain ... Read Answer >>
  4. What metrics can be used to analyze a telecommunications company if they have very ...

    Learn which equity and enterprise value metrics are useful when analyzing a telecommunications company that has very low ... Read Answer >>
  5. What are the main benchmarks that track the forest products sector?

    Learn how the net debt to EBITDA ratio, EBITDA to interest ratio and debt to capital ratio financial benchmarks are used ... Read Answer >>
  6. Why is EBITDA commonly used as a valuation metric for telecommunications companies?

    Examine the nature of the telecommunications sector, and learn why it makes EBITDA a good equity valuation metric for telecom ... Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center