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Enterprise value definition

Description

Enterprise value (EV) is a measure that indicates the company’s value, and is calculated by adding market capitalization to total debts and extracting cash (also cash equivalents). Data to calculate this ratio is collected from balance sheet and stock market bulletin.

This measure is important before buying a company. It is easily calculated and shows company’s takeover price which can be compared to the price you are being asked to pay. It is worth to mention that EV is a more theoretical measure and relying on it alone is not recommended. Further analysis is needed.

Norms and limitations

In general there are no norms for this ratio.

Formula

Market capitalization (market value of equity, stock price) is the total market value of all of outstanding shares and is calculated by multiplying share price by the amount of share outstanding.

Debt (total debt, total liabilities) is by calculated adding together the long term debt with the short term debt. These two measures can be easily located on the balance sheet.

Cash and cash equivalents (marketable securities) are absolute liquid assets.