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Enterprise Value

Enterprise value (EV) represents the total cost of acquiring a company, calculated by adding market capitalization, preferred stock, outstanding debt, and minority interest, then subtracting cash and cash equivalents. For example, ABC Limited's EV is $8 million, while Apple Inc.'s EV as of September 29, 2018, was approximately $1.16 trillion. A company's EV can be negative if its cash exceeds the sum of its market cap and debts, indicating inefficient asset utilization.

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2 views

Enterprise Value

Enterprise value (EV) represents the total cost of acquiring a company, calculated by adding market capitalization, preferred stock, outstanding debt, and minority interest, then subtracting cash and cash equivalents. For example, ABC Limited's EV is $8 million, while Apple Inc.'s EV as of September 29, 2018, was approximately $1.16 trillion. A company's EV can be negative if its cash exceeds the sum of its market cap and debts, indicating inefficient asset utilization.

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Enterprise Value

Dipti Periwal
• The enterprise value of a company can be
ideally defined as an amount that represents
the entire cost of the company in case some
investor intends to acquire 100% of it.
• The formula for enterprise value is calculated
by adding the company market
capitalization, preferred stock,
outstanding debt, and minority
interest together, and then deducting
the cash and cash equivalents obtained
from the balance sheet.
• Enterprise value Formula = Market
Capitalization + Preferred stock +
Outstanding Debt + Minority Interest
– Cash & Cash Equivalents
Example
• Example #1
• Let us assume that a company ABC
Limited has the following financial
information:
• Shares Outstanding: 2,000,000
• Current Share Price: $3
• Total Debt: $3,000,000
• Total Cash: $1,000,000
Solution
• Therefore, given
• Market capitalization = 2,000,000 * $3 =
$6,000,000
• Preferred stock = $0
• Outstanding debt = $3,000,000
• Minority interest = $0
• Cash and cash equivalents = $1,000,000
• Based on the above formula, the calculation
of the enterprise value of ABC Limited can
be as follows:
• EV Formula = Market capitalization +
Preferred stock + Outstanding debt +
Minority interest – Cash and cash
equivalents
• Enterprise value = $6,000,000 + $0 +
$3,000,000 + $0 – $1,000,000
• Enterprise value = $8,000,000 or $8 million
Example – 2
• Let us take the real-life example of Apple
Inc.’s annual report as on September 29, 2018.
The following information is available:
• Given
• Market capitalization (millions) = 4,754.99 *
$225.74 = $1,073,391
• Preferred stock = $0
• Outstanding debt (millions) = $11,964 +
$102,519 = $114,483
• Minority interest = $0
• Cash and cash equivalents (millions) = $25,913
• Based on the above formula, the calculation of the
enterprise value of Apple Inc. can be as follows:
• EV Formula = Market capitalization + Preferred
stock + Outstanding debt + Minority interest – Cash
and cash equivalents
• Enterprise value of Apple Inc. (millions) =
$1,073,391 + $0 + $114,483 + $0 – $25,913
• Enterprise value of Apple Inc . (millions) =
$1,161,961
• Therefore, Apple Inc.’s enterprise value as on
September 29, 2018, stood at around $1,161.96
billion or 1.16 trillion.
Can EV be Negative?
• A company's EV can be negative if the total
value of its cash and cash equivalents surpasses
that of the combined total of its market cap and
debts.
• This is a sign that a company is not using its
assets very well—it has too much cash sitting
around not being used.
• Extra cash can be used for many things, such
as distributions, buybacks, expansion, research
and development, maintenance, employee pay
raises, bonuses, or paying off debts.
EV as a Valuation Multiple

• EV/EBITDA
• Enterprise Value vs. Market Cap
• Why doesn't market capitalization
properly represent a firm's value? It
leaves a lot of essential factors out, such
as a company's debt and cash reserves.
• Enterprise value is a modification of
market cap, as it incorporates debt and
cash for determining a company's value.

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