Keys to Enterprise Value
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.
The enterprise value of a company shows how much money would be needed to buy that company.
EV is calculated by adding market capitalization and total debt, then subtracting cash and cash equivalents.
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.
In its most basic form the formula for calculating enterprise value is:
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.