Want to know what an entire company is worth? You need to work out its enterprise value

Julie Brownlee, Fsp Invest, 19 Sep. 2014

Tags: enterprise value, ev, what is enterprise value, company value, value of a company, market capitalisation

When you think about the value of a company, you might think it’s just a case of looking at its market capitalisation. That is, multiply the number of shares outstanding by the current share price.

But the market capitalisation just gives you the value of the equity of a company. It doesn’t include other factors.

To understand the value of a company as a whole, you need to calculate the enterprise value.

So what is the enterprise value? And how can you calculate the enterprise value?

Let’s take a closer look…

What is the enterprise value?

Unlike the market capitalisation, the enterprise value (EV) is the value of a company as a whole, not just its equity.

In other words, the enterprise value is what you’d pay for the whole company if you bought it outright. This also means you’d take on the company’s debts.

How to calculate a company’s enterprise value

To calculate the enterprise value you firstly need the company’s market capitalisation. You can work this out by multiplying the number of shares in circulation by the current share price.

To the market capitalisation add in the net debt (that’s any debt minus any cash), minority interests and preferred shareholdings (if any).

If a company has a lot of cash, it may have a negative enterprise value.

Why analysts use enterprise value

Enterprise value can be a popular calculation among analysts because it’s a good way of weighing companies up.

For instance, by using enterprise value, it doesn’t matter how a company finances itself, you can easily compare similar companies with different financing structures.

Analysts may do this by using a measure such as EV/EBITDA. This compares a company’s enterprise valuation with its profits before depreciation.

So there you have it, why you need to work out a company’s enterprise value if you want to know what it’s really worth.

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