Definition
Enterprise value represents what it would cost to acquire the entire business, accounting for both equity value and net debt. EV is preferred over market cap for valuation multiples because it normalizes for capital structure differences. A company with significant cash will have EV below market cap, while a heavily indebted company will have EV well above.
functions Formula
EV = Market Cap + Total Debt + Minority Interest + Preferred Shares − Cash
lightbulb Example
Market cap is $500M, debt is $100M, cash is $50M. EV = $500M + $100M - $50M = $550M. Despite a $500M market cap, an acquirer would effectively pay $550M.
verified_user Key Points
- True acquisition cost of a business
- Capital-structure neutral for fair comparison
- EV/EBITDA is the most common valuation multiple
- Negative EV can occur with excess cash (potential value trap)