What is Enterprise Value (EV)?

Enterprise Value (EV) represents the total value of a company, including both its equity and debt, minus cash.

Enterprise Value gives a more comprehensive view of a company’s true worth compared to just its market capitalization.

How is EV calculated?

EV = [(Market Capitalization + Total Debt) – (Cash and Cash Equivalents)]

For example, if a company has:

Market Capitalization: $1 billion

Total Debt: $200 million

Cash: $100 million

The EV would be: EV = 1B + 200M – 100M = 1.1B

Why is EV important for investors?

• True Company Value: EV gives a clearer picture by including debt and cash, unlike market cap alone.
• Comparing Companies: EV helps compare companies of different sizes, especially when they have different debt levels.

Using EV with Other Ratios

• EV/EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): Used to assess a company’s valuation relative to its earnings, often considered in mergers or acquisitions
• EV/Revenue: Useful for evaluating companies with negative profits, providing a revenue-based comparison

Understanding EV ensures you are evaluating the full picture of a company’s financial health before investing.

Hope this helps you make a sound investment decision.

All the best

God Bless!