Keys to Enterprise Value
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Enterprise value is a used to value a company and is often considered an accurate representation of a company's value when compared to its market capitalization.
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The enterprise value of a company shows how much money would be needed to buy that company.
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EV is calculated by adding market capitalization and total debt, then subtracting cash and cash equivalents.
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Enterprise Value calculates what it would cost to completely take over a business. To do so you would have to buy all the shares in a business (market cap) and extinguish all debt (total debt). Once you took over the business you could distribute all excess cash to yourself.
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In its most basic form the formula for calculating enterprise value is:
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Enterprise value has been shown by many valuation ratios to be superior to market capitalization when ranking stocks based on value. Comparative ratios using EV—such as a comparison of EV to earnings before interest and taxes (EBIT)—demonstrate how EV works better than market cap for assessing a company's value.
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