What does a company's enterprise value represent?

1. EV is an economic measure reflecting the market value of the whole business rather than its current market capitalization.

2. It measures the theoretical takeover price that an investor would have to pay to buy a company.

3. Enterprise value is calculated as Market Capitalization + Total Debt - Cash Equivalents.


4. Long-term debt increases the value of a company while cash equivalents decrease the effective price an acquirer has to pay.

5. However, valuation multiples using EV are much more stable and allow for easier comparisons between companies as they eliminate distortions coming from different debt levels, minorities or non-operational assets.


(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)