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.

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