Enterprise Value (also known as EV) is a metric that attempts to reflect the market value of a firm. It can be used as an alternative to market capitalization.
Essentially, Enterprise Value attempts to provide a more accurate valuation aimed at a buyer. Whilst a firm’s market capitalization will indicate share price x share quantity, the firm may have a lot of debt which the acquirer would need to pay off (thereby adding the price of the transaction).
The calculation for Enterprise Value is:
- Market Capitalization + Debt + Minority Interest + Preferred Shares – Cash & Cash Equivalents
Enterprise Value is a far better metric when considering mergers and acquisitions as it provides a ‘truer’ valuation on a company by considering more factors than market capitalization, the main one being debt.
- Cash & Cash Equivalents (CCE)
- Comparable Analysis
- EV / EBITDA
- Minority Interest
- Precedent Transactions
- Public Comparable Companies
- Trading Multiple