Loading the player...

What is a 'Total Enterprise Value - TEV'

Total enterprise value (TEV) is a valuation measurement used to compare companies with varying levels of debt. TEV is calculated as

TEV = Market Capitalization + Interest Bearing Debt + Preferred Stock - Excess Cash

Some financial analysts use a simple market capitalization analysis to derive the value of a company, but businesses often have different financial structures, making TEV a better value measure when comparing companies.

BREAKING DOWN 'Total Enterprise Value - TEV'

TEV is used to derive the overall economic value of a company. It is used in finance to either compare two companies with different levels of debt and equity or to analyze a potential takeover target. This is because debt and cash have huge impacts on a company's financials. Often, two companies that seem to have similar market capitalizations have very different enterprise values, due to these effects.

For example, if a company was trying to compare its value to the value of a competitor, it would have to look beyond market capitalizations. Let's say that the competitor has a market capitalization of $100 million but has $50 million in debt. The company conducting the comparison might also have a market cap of $100 million but might instead have no debt and $10 million cash on hand. Based on TEV, the competitor's value would actually be higher, due to the effects of the debt.

This TEV measure also dictates potential takeover targets and the amount that should be paid for the acquisition. Using the example above, let's say that instead of a comparison to a competitor, the company was looking to acquire a competitor. Market capitalization rates would say that the takeover target is worth $100 million, the price tag for acquiring the company. Using the TEV, however, shows that the cost of acquisition is really $130 million, due to the debt. This is a more accurate price for the company.

Using the TEV to Normalize Values

The TEV, in addition to a comparison and potential takeover tool, also allows a company or financial analyst to normalize the valuation of a company. A lot of people in the financial space use the price-to-earnings (P/E) ratio to derive a company's value, above and beyond its market capitalization. However, a company's P/E ratio does not always provide a full picture.

Since it only takes into account market capitalization and profits, it can make a public equity look expensive compared to other companies when in reality, it's not. It's possible to normalize a company's valuation by taking the EBITDA-to-enterprise value rather than the P/E ratio. This allows the stock price of public companies to be better evaluated for investment purposes.

RELATED TERMS
  1. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative ...
  2. Sum-Of-Parts Valuation

    Valuing a company by determining what its divisions would be ...
  3. Capitalization Ratios

    Indicators that measure the proportion of debt in a company’s ...
  4. Long-Term Debt To Capitalization ...

    A ratio showing the financial leverage of a firm, calculated ...
  5. Capital Structure

    A mix of a company's long-term debt, specific short-term debt, ...
  6. Comparable Company Analysis - CCA

    A process used to evaluate the value of a company using the metrics ...
Related Articles
  1. Investing

    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.
  2. Investing

    McDonald's Stock: Capital Structure Analysis (MCD)

    Learn about the importance of capital structure, and what equity and debt capitalization measures can tell us about the performance of McDonald's Corporation.
  3. Investing

    Using Enterprise Value To Compare Companies

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

    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.
  5. Investing

    Evaluating A Company's Capital Structure

    Learn to use the composition of debt and equity to evaluate balance sheet strength.
  6. Investing

    Pinpoint Takeovers First

    Use these seven steps to discover a takeover before the rest of the market catches on.
  7. Investing

    Lowe's Stock: Capital Structure Analysis (LOW)

    Examine Lowe's Companies' equity capitalization, debt capitalization and enterprise value to analyze trends in the retailer's capital structure.
  8. Investing

    Yahoo Stock: Capital Structure Analysis (YHOO)

    Learn about Yahoo's capital structure, including whether or not a decline in year-over-year earnings is leading the company to use more debt.
  9. Investing

    GM Stock: Capital Structure Analysis

    Learn why GM's enterprise value increased, and get an update on the company's capital structure, including equity and debt capitalization.
  10. Investing

    Will Corporate Debt Drag Your Stock Down?

    Borrowed funds can mean a leg up for companies or the boot for investors. Find out how to tell the difference.
RELATED FAQS
  1. What's the difference between enterprise value and market capitalization?

    Learn the difference between two commonly utilized valuation tools: market capitalization and enterprise value, and see how ... Read Answer >>
  2. How can I use the debt-to-capital ratio to evaluate a stock?

    Understand the significance of the debt to capital ratio of financial leverage, and learn how investors and analysts make ... Read Answer >>
  3. 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 >>
  4. What are the different capitalization ratios?

    Learn about capitalization ratios, three different ratios that measure debt in relation to capital structure and how to calculate ... Read Answer >>
  5. Does a high debt to capital ratio make a company a bad investment?

    Understand the debt to capital ratio and why a high debt to capital ratio doesn't necessarily mean that a stock is a bad ... Read Answer >>
  6. 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 >>
Hot Definitions
  1. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  2. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  3. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  4. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  5. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  6. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
Trading Center