Enterprise Value, or EV in English, is a measure of the total value of a company, indicating the acquisition price of a listed company. It takes into account both the company's owner's equity and debt. Enterprise value is different from a company's market capitalization. When calculating a company's enterprise value, you add the company's current market capitalization, total debt (Debt), and then subtract the company's current cash and cash equivalents. Enterprise value is more commonly used when a company is about to be acquired, and the acquirer will calculate the enterprise value to measure the possible benefits after the acquisition. Total Debt includes a company's short-term debt and long-term debt. This portion represents the debt incurred by the company and creditors have priority claims on these debts. Short-term debt and long-term debt information can be found on a company's balance sheet. Cash and Cash Equivalents refer to a company's cash on hand that can be used immediately and assets that can be quickly converted into cash, such as short-term securities (Short-term Maketable Securities). The cash a company has can be used to pay down debt, so this amount is deducted when calculating the enterprise value. It should be noted that in specific calculations, short-term securities in the balance sheet need to be included in cash and cash equivalents. In some cases, if the company issues preferred stock, and/or contains minority interests in subsidiaries, you will also need to factor this into the enterprise value when calculating it. Therefore, the formula for calculating adjusted enterprise value is as follows: Enterprise Value = Market Capitalization + Total Debt + Preferred Equity + Minority Interest – Cash and Cash Equivalents Among them: Preferred stock holders have priority over common stock holders in the event of company liquidation, so preferred stock interests need to be added to the calculation of enterprise value. If a company includes subsidiaries in its consolidated statements that are not wholly owned, this also needs to be considered in the enterprise value, since minority interests reflect the interests held by other shareholders in those subsidiaries. How is a business valued? This chapter will perform example calculations using Apple’s September 2023 financial report: The balance sheet from AAPL's financial report is shown below. From it, we can find information such as cash and cash equivalents, short-term debt, long-term debt: Cash and cash equivalents Cash and cash equivalents$29,965 million Short-term securities Marketable securities (note: this item is classified as cash and cash equivalents because it can be quickly converted into cash) $31,590 million Total cash and cash equivalents = $29,965 million + $31,590 million = $61,555 million Term debt$9,822 million Long-term debt (Term debt)$95,281 million Total debt = $9,822 million + $95,281 million = $105,103 million So, You can find Apple’s closing price at the end of September 2023 from the website below: $171.21 Meanwhile, from the earnings report below, you can also find Apple's average number of common shares: 15,744,231 Thousand shares. Therefore, Apple’s current enterprise value is: Enterprise Value = Market Capitalization + Total Debt – Cash and Cash Equivalents = 15,744,231 thousand shares x $171.21 + $105,103 million – $61,555 million = $2.74 billion What is the guiding significance of corporate value? Enterprise value is a comprehensive reflection of a company's total value, taking into account all components of a company's capital structure, including equity, debt and cash and cash equivalents. Compared to market capitalization (which reflects only equity value), enterprise value provides a more comprehensive view of a company's overall value.
In mergers and acquisitions (M&A) transactions, enterprise value is a key reference metric. It represents the actual amount a potential acquirer would have to pay, including assuming the target's debt, not just the equity value to shareholders. Therefore, it is considered a better indicator for evaluating the acquisition price of a company, since the acquirer is usually required to assume the debt and cash of the target company. Additionally, enterprise value is often used along with earnings before interest, taxes, depreciation, and amortization (EBITDA) or earnings before interest and tax (EBIT) to value a company. enterprise value multiple Enterprise value multiple, also known as Enterprise Multiple in English, is calculated as the ratio of enterprise value (EV) to earnings before interest, taxes, depreciation and amortization (EBITDA), often abbreviated as EV/EBITDA. Among them, earnings before interest, taxes, depreciation and amortization (EBITDA) is the total of the company's net profit from continuing operations, interest, taxes, depreciation and amortization expenses, that is: EBITDA = Net Profit + Interest + Taxes + Depreciation and Amortization Using the EV/EBITDA value can initially assess whether a company is overvalued or undervalued. A lower enterprise ratio indicates that the enterprise is undervalued, and a higher ratio indicates that the enterprise is overvalued. EV/EBIT EV/EBIT is a variant of enterprise value multiple. Compared with enterprise value multiple, the calculation formula of EV/EBIT takes depreciation and amortization into account. Among them, profit before interest and taxes is the profit before taxes and interest, that is, net profit plus interest and taxes, that is: EBIT = Net Profit + Interest + Taxes This ratio can also be used to measure whether a company's stock price is overvalued or undervalued relative to companies in the same industry. A lower ratio indicates that the stock price may be undervalued, and a higher value indicates that the stock price may be overvalued. At the same time, the EV/EBIT ratio is useful for capital-intensive companies where depreciation and amortization constitute a large proportion of the company's economic costs. What are the similarities and differences between enterprise value and market capitalization? Enterprise Value Market Cap Market capitalization + total debt + preferred equity + minority interests – cash and cash equivalents Market value A measure of the total value of a company's stock used to evaluate the capital required to acquire a public company. More guides to company valuation What are minority interests? How to handle the profits of subsidiaries? What is Shareholders’ Equity? Shareholders’ Equity What is the Price to Cash Ratio (P/CF)? How to calculate? What is Operating Expense OpEx? Operating Expenses What is Cost of Goods Sold (COGS)? How to calculate? What is company profit? Gross profit, operating profit, net profit What is enterprise value multiple? Enterprise Multiple What are preferred shares? Preferred Stock What is operating leverage? Degree of Operating Leverage What is debt service ratio? Debt Service Coverage Ratio