Enterprise Value (EV)

1. Definition

Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market capitalization. It represents the theoretical price tag to buy the entire company. It includes the value of equity (Market Cap) and debt, while subtracting cash and cash equivalents.

2. Calculation

$$ \text{EV} = \text{Market Capitalization} + \text{Total Debt} - \text{Cash and Cash Equivalents} $$

• Market Cap: The value of the company's equity shares.
• Total Debt: The debt the acquirer would have to assume.
• Cash: Cash is subtracted because the acquirer can use the target company's own cash to pay down a portion of the debt immediately, effectively lowering the purchase price.

3. vs. Market Capitalization

While Market Cap reflects only the value of the company's equity, EV reflects the entire capital structure. * Example: A company with a Market Cap of $100M and Debt of $50M has an EV of $150M (assuming zero cash). This makes EV a more accurate metric for M&A analysis than Market Cap alone.

4. Application

EV is crucial for comparing companies with different capital structures (debt levels). It is widely used in valuation multiples such as EV/EBITDA. This ratio measures the value of the company relative to its operating cash flow, helping investors understand how many years it would take for the company's earnings to pay off the cost of acquisition.