Definition
Enterprise Value (EV) represents the total value of a company’s core business operations, independent of its capital structure. It reflects the market value of the net operational assets.
Conceptual Meaning
- Value to All Capital Providers: EV represents the value attributable to all investors: debt holders, preferred stockholders, and common equity holders.
- Theoretical Takeover Price: Conceptually, it’s the theoretical price an acquirer would pay to buy the core business operations, effectively taking over the claims of both debt and equity holders (after accounting for cash).
- Capital Structure Neutral: Because it includes the value of claims from both debt and equity, EV is independent of financing decisions, making it suitable for comparing companies with different leverage ratios.
Basic Calculation
A common way to calculate EV starts from Equity Value: (Note: Minority Interest and Preferred Stock are included if present)
Usage
- Used frequently in Valuation Multiples (like EV/EBITDA, EV/EBIT, EV/Sales) because both numerator (EV) and denominator (operational metrics) are available to all capital providers.
- Essential starting point in Mergers & Acquisitions (M&A) analysis and Discounted Cash Flow (DCF) Analysis.
See also: Equity Value, Valuation, Capital Structure, Debt, Cash & Equivalents, Valuation Multiples, EBITDA