Enterprise Value (EV)
What Is the Enterprise Value (EV) of a Company?
Enterprise value is a bare-bones approach to the valuation of a company. On the off chance that it were the target of an acquisition, potential buyers would value a publicly traded company in view of its market capitalization and debt, deducting the amount of cash it holds. That can be seen as the total cost of the company being taken over.
Since the acquirer would be taking on debt following the acquisition, any cash the company holds might actually be utilized to reduce that debt. In this way, in the event that a company has more cash than debt, the cost of acquisition would be lower, and subsequently, it turns out to be more alluring to the likely investor.
Note: There is a subtlety between market capitalization and equity value, however both allude to the stock valuation of a company. Equity value is frequently utilized for companies that are privately held, while market capitalization is regularly utilized for publicly traded companies since their shares trade on public markets. In making sense of enterprise value here, we alternate between market capitalization and equity value.
For private equity investors, enterprise value is market capitalization plus net debt (debt minus cash). It gives a brief look into the costs of endeavoring a leveraged buyout of a targeted company. Taking on too much debt while borrowing to pay for an acquisition builds the risk of repayment, and consequently, that could raise the cost for financing.
For bond investors, enterprise value can likewise show the costs of leading a leveraged buyout. It offers signs on how a company could possibly repay its bondholders: the higher the cash levels, the greater the purported "pad" it gives to repay debt. Simultaneously, it gives a sense concerning the amount more debt a company can take on.
How Do You Calculate Enterprise Value?
The essential formula for enterprise value is market value of equity plus debt minus cash. There are varieties in which preferred stock, minority interest, investments, and cash equivalents are incorporated.
Essential Enterprise Value Formula
Enterprise Value = Market Capitalization + Debt - CashEnterprise Value = Market Capitalization + Debt - Cash
For a publicly traded company, market capitalization is calculated by increasing the number of outstanding common shares by the share price. Looking at the balance sheet, debt involves total debt, including liabilities and long-term debt. Cash is comprised of endlessly cash equivalents, and different things including marketable securities. These things can be found on the financial statement of a company's customary and periodic filing (Form 10-Q for quarterly reporting and Form 10-K for annual) with the Securities and Exchange Commission.
| Nine Months Through September 30, 2021 | Tesla | Amazon | Coca-Cola (October 1, 2021) |
|---|---|---|---|
| Enterprise Value | 798,470,307,428.96 | Â 1,761,061,217,604.80 | Â 271,374,660,912.72 |
| EV (in millions of dollars) | Â 798,470 | Â 1,761,061 | Â 271,375 |
| Market Capitalization | 778,787,307,428.96 | Â 1,666,000,217,604.80 | 229,015,660,912.72 |
| Â Share Price | Â 775.48 | 3,285.04 | 53.02 |
| Â Shares Outstanding | Â 1,004,264,852 | 507,147,620 | 4,319,420,236 |
| Debt (in millions of dollars) | Â 35,778 | Â 174,049 | 55,384 |
| Â Total Liabilities | Â 29,340 | Â 123,994 | 15,990 |
| Â Long-Term Debt/Other Debt | 6,438 | 50,055 | Â 39,394 |
| Cash | Â 16,095 | 78,988 | 13,025 |
| Â Cash and Cash Equivalents | 16,065 | 29,944 | 11,301 |
| Â Marketable Securities | 30 | 49,044 | 1,724 |
| EBITDA | Â 6,071 | 49,041 | 12,011 |
| Â Net Income | 3,301 | 19,041 | 7,357 |
| Â Interest Expenses | 300 | 1,327 | 1,432 |
| Â Taxes | 407 | 4,179 | 2,111 |
| Â Depreciation and Amortization | Â 2,063 | 24,494 | 1,111 |
| Revenue/Sales | Â 36,104 | Â 332,410 | 29,191 |
| Cost of Goods Sold/Cost of Revenue | Â 27,345 | 189,509 | 11,269 |
| Gross Profit | 8,759 | Â 142,901 | Â 17,922 |
| Ratios | |||
| EV/EBITDA | Â 131.52 | Â 35.91 | 22.59 |
| EV/Revenue or Sales | 22.12 | Â 5.30 | 9.30 |
| EV/Gross Profit | Â 91.16 | Â 12.32 | 15.14 |
Famous Ratios Related to Enterprise Value
See the table above for instances of these ratios.
EV/EBITDA
This ratio compares enterprise value to earnings before interest, tax, debt and amortization (EBITDA), which measures a company's profitability or ability to produce cash. A numerous of 10 is much of the time saw by certain investors as fair, however a lower ratio could be great. A various of 1 means that the company's enterprise value is equivalent to the company's profitability, which makes it a possible investment.
EV/Revenue or EV/Sales
This ratio compares enterprise value to revenue or sales. A high ratio shows that the company's revenue or sales are lower than its enterprise value. On the flip side, low multiples could show the company is undervalued.
EV/Gross Profit
This ratio compares enterprise value to gross profit. Like EV/revenue, a low ratio is great.
EV/Market Capitalization
This ratio compares enterprise value to market capitalization. It can demonstrate the company's debt position, however a high ratio shows large debts.
For future reference, one more measurement to look out for: debt-to-equity ratio. That shows a company's debt leverage. The higher the ratio, the more debt it conveys.
Highlights
- Enterprise value is utilized as the basis for the overwhelming majority financial ratios that measure the performance of a company.
- Enterprise value remembers for its calculation the market capitalization of a company yet in addition short-term and long-term debt as well as any cash on the company's balance sheet.
- Enterprise value (EV) is a measure of a company's total value, frequently utilized as a more exhaustive alternative to equity market capitalization.
FAQ
What Is Enterprise Value and How Does It Differ From Market Capitalization?
Enterprise value is a famous measurement of the total value of a company. It very well may be viewed as the hypothetical price that would should be paid to completely acquire a company in a going-private transaction. Unlike market capitalization, which reflects just the value of the company's equity, enterprise value mirrors the size of the company's debts as well as its cash reserves. It is a famous figure among investors and analysts and is many times utilized in financial ratios.
Why Is Debt Added to Enterprise Value?
Higher debt prompts a higher enterprise value since it addresses an additional cost that must be paid by any eventual acquirer. For example, in our previous model, assume that the company has $10 million in debt. In view of that, you currently know that notwithstanding the $100 million you want to purchase the shares from its existing shareholders, you likewise need an extra $10 million to pay off the company's debts. Assembling these figures, your total enterprise value would be $100 million in market capitalization, plus $10 million in debt, minus $20 million in cash, for a total of $90 million.
Why Is Cash Deducted From Enterprise Value?
To comprehend the reason why cash is deducted from enterprise value, assume that you are a private investor wishing to purchase 100% of a publicly-traded company. While planning your purchase, you note that the company's market capitalization is $100 million, meaning you will require $100 million to buy every one of the shares from its existing shareholders. Yet, imagine a scenario where the company likewise has $20 million in cash. In that scenario, your real "cost" for purchasing the company would just be $80 million, since buying the company would quickly give you access to its $20 million in cash. All else being equal, a higher cash balance prompts a lower enterprise value, as well as the other way around.
