Enterprise Value
In short
Total value of a business — market cap plus debt minus cash
Market cap tells you what the equity is worth. Enterprise value tells you what the WHOLE company is worth, including what it owes (debt) minus what it holds in cash. If a company has a $10B market cap, $3B of debt, and $1B of cash, its EV is $12B — the closer estimate of a true acquisition price.
EV adjusts market capitalization to reflect the capital structure a buyer actually takes on: total debt is added because an acquirer would need to assume or repay it, and cash is subtracted because a buyer could use the target's own cash to help fund the deal. This makes EV a more complete measure of what it costs to control the whole business than market cap alone — two companies with identical market caps can have very different EVs if one carries much more debt. EV underpins capital-structure-neutral multiples like EV/EBITDA, EV/Sales, and EV/FCF, generally preferred over price-based multiples (P/E, P/S) when comparing companies with different leverage, since P/E only reflects the return to equity holders while ignoring how much of the business is financed with debt versus equity.
Formula
EV = Market Cap + Total Debt - Cash & EquivalentsRelated concepts
- EV/EBITDA — Like P/E but for the entire company including its debt. A company with lots of debt looks cheap on P/E but expensive on EV/EBITDA — this ratio tells the full story.
- P/E Ratio — Imagine buying a lemonade stand that makes $100/year. If it costs $2,000, the P/E is 20 — you need 20 years of earnings to pay it off. Lower means cheaper.
- Debt-to-Equity Ratio — If a company has $50 in debt and $100 in shareholder equity, D/E is 0.5. Higher means more leveraged — good in boom times, dangerous in downturns.