Enterprise value (EV) is a company’s total value, generally defined by its financing. This metric takes into account the company’s current share price and the cost of repaying debt. Enterprise Value is calculated as, the value of equity + total debt + preferred stock + minority interest.
Here is an example of EV calculation for Company ABC: Shares Outstanding: $ 3,000,000Latest share price: $2Market capitalization = 3,000,000 * $2 = $6,000,000Net Debt: $2,000,000Cash: $2,000,000EV = Market capitalization + Outstanding debt – Cash = $6,000,000 + $2,000,000 – $2,000,000= $8 million
Why it matters
Enterprise value is a financial calculation that offers a realistic view of the amount of money needed to acquire a public company from those who have a financial interest in it.This could include equity shareholders and lenders. It tells the reader, how much they need to pay for buying the company’s stock, how much to pay off its debt and how much of the company’s cash reserves will come through upon acquisition. It also helps potential buyers compare the company with its peers before taking an investment/buyout decision.