Enterprise value (EV) measures a company's total value, often used as a more comprehensive alternative to market capitalization. EV includes in its calculation the market capitalization of a company but also short-term and long-term debt and any cash or cash equivalents on the company's balance sheet.
Components of Enterprise Value (EV)
Enterprise value uses figures from a company's financial statements and current market prices. The components 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.
Unfunded pension liabilities (if any): The amount of capital lacking to cover pension payouts or the amount a company needs to set aside to make pension payments in an unfunded plan. Can be added market cap if this value is present.
Minority interest: The equity value of a subsidiary with less than 50% ownership. It can be added to market cap for EV calculation.
Cash and cash equivalents: The total amount of cash, certificates of deposit, drafts, money orders, commercial paper, marketable securities, money market funds, short-term government bonds, or Treasury bills a company possesses.
Enterprise Value Formula and Calculation
EV = MC + Total Debt − C
where:
MC = Market capitalization; equal to the current stock price multiplied by the number of outstanding stock shares.
Total debt = Equal to the sum of short-term and long-term debt.
C = Cash and cash equivalents; the liquid assets of a company, but may not include marketable securities.
Source: Investopedia, Enterprise Value (EV) Formula and What It Means, accessed 24 December 2023, <https://www.investopedia.com/terms/e/enterprisevalue.asp>
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