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Enterprise value

Enterprise value is the value of a company, incorporating equity, debt, and cash. It is essentially a way of measuring what it would cost to buy the company. Also often called total enterprise value (TEV).

Expanded Definition

When you buy a company outright, not only do you get all the income and inventory and everything else, you also get the cash held by the company. So, in effect, you pay to buy the company and then get some of that back immediately. For a debt-free company, that's great. But many companies also have debt. That means you are taking on the obligation to pay that debt back as well, so you have to cough up the extra dough.

That's enterprise value. It is the market cap of the company, minus the cash, plus the debt. These two items are found on the balance sheet. Cash is usually "cash and equivalents" while debt is both short-term and long-term.

When to use enterprise value

Enterprise Value (EV) is often used in evaluating the entire firm. In using the P/E ratio, you are looking at the earnings as due to the equity holders. But if you want to take into account the debt-holders, use EV and free cash flow to the firm. This ratio is abbreviated as EV/FCF.

Some analysts also use the EV/EBITDA ratio, where EBITDA is earnings before interest, taxes, depreciation, and amortization. Sometimes a bank may use this ratio as part of the loan covenants they require of the company.

If the company in question has a considerable debt load, enterprise value can be used as a benchmark for a potential acquisition price. In other cases, if a company has no net income but plenty of cash, it can be used as a measure of what the intangibles of the business are worth -- e.g., patents, brands, products in development.

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