How to Calculate Enterprise Value

Calculate Enterprise Value

Enterprise Value (EV) is a measure of a firm's value. For investors, it is equivalent to a book value as it represents the market value of a firm minus the intrinsic (actual) value of debt. Market capitalization might be a good measure of how the market values a company, but only EV provides a measure of a firm's value accounting for debt.

Step 1

Review the formula for EV. The calculation for EV is Market Capitalization + Debt - Cash and Short Term Investments.

Step 2

Gather information. Market Capitalization can be found by multiplying the stock price by the number of shares outstanding. Debt can be found on the balance sheet by adding both short and long term debt. Cash and short-term investments can also be found on the balance sheet in current assets. These variables are also readily available on any finance website, e.g. Yahoo! Finance. Do a search by the ticker symbol and then go to balance sheet information.

Step 3

Calculate EV. Add Market Capitalization to Debt and subtract Cash and Short-term Investments.

Step 4

Work through two example scenarios. You will need to know all the variables outlined in Step 1. In order to show both uses of the number, let's look at two scenarios. One will show how to calculate EV for a company with no debt. The other will show how to compare a company with no cash and short-term investments. They both have a market capitalization of $50 million. Scenario 1 Variables: Company A has $20 million in debt and Company B has no debt. Cash and short-term investments are $0. Scenario 2 Variables: Company A has $5 million in cash and short-term investments. Company B has $15 million in short-term investments. Both companies have $20 million in debt.

Step 5

Calculate the EV for Scenario 1. EV for Company A is Market Capitalization ($50 million) + Debt ($20 million) - Cash and Short term investments ($0) = $70 million. EV for Company B is Market Capitalization ($50 million) + Debt ($0) - Cash and Short term investments ($0) = $50 million. While both companies have the same market capitalization, the better buy is Company B, or the company with no debt.

Step 6

Calculate the EV for Scenario 2. EV for Company A is Market Capitalization ($50 million) + Debt ($0) - Cash and Short term investments ($5 million) = $45 million. EV for Company B is Market Capitalization ($50 million) + Debt ($0) - Cash and Short term investments ($15 million) = $35 million. While both companies have the same market capitalization and no debt, the better deal is Company B as you would assume $15 million in cash upon purchase of the company.

Tip

A common strategy for leveraged buy-outs (LBOs) is to look for companies with low EV's (also called the takeover value). The goal is to find a company with a great deal of cash on hand, and use that cash to "leverage" the purchase of the company. In other words, they take out a loan based on the cash they would have if they were to receive the loan and purchase the company.

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