Introduction

Enterprise value (EV) is a financial metric used to measure a company’s total value. It is used for the execution of various merger and acquisition deals. Companies prefer computing the enterprise value instead of any other valuation forms for various reasons. This guide will help you and analysts understand enterprise value meaning, its components, formula, and calculation steps.

What is enterprise value?

Enterprise value is a firm’s total value. It is the foundation for many financial ratios used to measure a company’s performance. It does not consider the equity value. Instead, it focuses on the entire market value.

Start Investing with Free Expert Advice!

You can use EV to determine a business’ worth in terms of purchase price. The method is beneficial in comparing companies with different debt-to-equity ratios or capital structures.

What are the components of enterprise value?

The various components of EV are:

1. Market capitalisation (MC)

Market capitalisation, or equity value, is calculated by multiplying a company’s outstanding common and preferred shares with the current stock price. During an acquisition, the acquiring company must pay at least the market capitalisation value to the company’s shareholders.

2. Total debt

Total debt refers to the sum of short and long-term debt. You must consider all interest-bearing liabilities, such as loans, bonds, etc.

3. Unfunded pension liabilities

This component refers to the capital amount a company must set aside for making pension payments. If the value exists, it can be included in the market capitalisation.

4. Cash and cash equivalents

In a company’s financial statement, cash and cash equivalents are one of the most liquid assets. They include marketable securities, commercial paper, short-term investments, etc. The value is deducted from the EV because it reduces a company’s acquiring cost.

5. Minority interest

Minority or non-controlling interest is a part of a subsidiary the parent company doesn’t own (the ownership stake is less than 50%). Generally, the parent company’s financial report includes such a subsidiary’s financial statements. To calculate EV, this interest amount can be added to market capitalisation.

How to calculate enterprise value?

The enterprise value formula is essential to understand if a company is valuable. The steps to calculate EV are:

1. Determine the company’s market capitalisation.

A company’s market capitalisation is the current market value of the company’s outstanding shares. It indicates how valuable investors consider the company’s stocks.

2. Compute the company’s total debt.

Debt is a vital financial metric for analysis as it indicates how much money the company owes to others before it becomes profitable. The calculation includes the total of all short and long-term outstanding debts.

3. Consider the company’s cash and cash equivalents.

These are the most liquid assets of the company. All currency in bank accounts, investments, treasury bonds, or other assets are cash. The company can liquidate these instantly to secure capital.

4. Put the values in the enterprise value formula.

After you have all the above values, place them in the enterprise value formula to arrive at an answer. The enterprise value formula is simple and helps a potential investor determine the company’s total value and debts for an accurate price evaluation.

The formula for the value is:

Enterprise value = Market capitalisation + Total debt - Cash and cash equivalents

Enterprise value formula - example

Company A has the following figures in its financial statement.

Using the above enterprise value formula, you can calculate EV.

EV = market capitalisation + total debt + minority interest - cash and investments

EV = 19006 + 1940 + 76 - 100

EV = Rs. 20,922

Conclusion

Enterprise value is an essential concept in corporate valuation. It is used in mergers and acquisitions. The calculation of EV involves subtracting highly liquid assets from the sum of a company’s market capitalisation and total debt. Highly-liquid assets refer to cash and cash equivalents or savings. Market capitalisation is the value of the company’s publicly traded shares.

Trending Blogs: NSE Holidays 2024 | BSE Holidays 2024 | Invest in Small Cap & Mid Cap Mutual Fund & Stocks | Companies affected by Rise in Crude Oil Price | Fall in IT Stocks | Launch of 4 New Indices | Revised Lot Size of Nifty Contracts | Impact of RBI Circular on Currency Trading | RBI’s New Lending Guidelines | Electric Air Taxis in India

Financial Calculators: SIP Calculator | SWP Calculator | Compound Interest Calculator | EMI Calculator | FD Calculator | Retirement Calculator | Option Value Calculator | Inflation Calculator | Lumpsum Calculator

Popular Stocks: ICICI Bank Share Price | HDFC Bank Share Price | CDSL Share Price | UPL Share Price | TCS Share Price | BHEL Share Price | Trident Share Price | IRFC Share Price | Adani Power Share Price