An enterprise value calculator is a tool that aids in calculating enterprise value (EV). A measure of a company’s entire worth. We’ll go through the broad concept, the enterprise value formula. Also, a simple example of how to calculate the enterprise value in this post. We’ll also compare this approach of company valuation to market capitalization and explain the usage of both of them.

What is enterprise value?

Enterprise value (EV) is a metric for a company’s entire worth that we sometimes use as a more complete alternative to market capitalization. EV takes into account not only a company’s market capitalization but also its short- and long-term debt, as well as any cash on its balance sheet. A prominent metric for valuing a firm for a possible acquisition is enterprise value.

If a firm were to be purchased, enterprise value (EV) might be thought of as the potential takeover price. EV varies from conventional market capitalization in various aspects, and many people believe it is a more accurate measure of a company’s worth. When a buyer takes over a company, for example, the buyer must pay off the debt of the company. As a result, enterprise value gives a considerably more realistic takeover valuation because it incorporates debt in its valuation calculation.

Why does market capitalization fail to accurately reflect a company’s worth? It ignores a number of significant aspects, such as a company’s debt and cash reserves, on the one hand. On the other hand, enterprise value is essentially a modified version of market capitalization, as it considers debt and cash when assessing a company’s worth.

Enterprise value formula

There are various components to the method for calculating enterprise value. First, unlike market capitalization, it considers sources of value other than shares.

Enterprise value = market capitalization + debt + minority interest + preferred shares – cash and cash equivalents

If the market capitalization is not easily available, multiply the number of outstanding shares by the current stock price to arrive at the market capitalization. After that, add up all of the debt on the balance sheet, including both short- and long-term debt. Finally, deduct any cash and cash equivalents from the overall debt after adding the market capitalization.

How to calculate enterprise value?

We determine a corporation’s enterprise value not just by its shareholder contribution or the amount of money invested in the company by its shareholders; it also considers short- and long-term debt, as well as cash reserves. While “debt” and “cash” are straightforward phrases, market capitalization requires some explanation.

Pundits frequently debate whether a company’s stock price has increased or decreased. This can be entertaining but without further information, such as how many outstanding shares, the actual price of a share of stock is useless in evaluating a company’s value. Instead, the company’s market capitalization—the total dollar value of the company’s outstanding shares—is calculated by multiplying the share price by the number of outstanding shares.

As a basic example, Company A’s stock may trade at $100 per share, whereas Company B’s stock trades for $20. However, if Company A has 100 million shares outstanding and Company B has 500 million, their market capitalization is exactly the same: $10 billion.

100 million shares x $100 = 500 million shares x $20

What are the Components of EV?

1. Investing value. We calculate the equity value of a corporation by multiplying the number of fully diluted shares outstanding by the stock’s current market price.

2. Debt Total. The contribution of banks and other creditors to the total debt we call total debt. They are interest-bearing obligations that include both short- and long-term debt. Because, in principle, when a firm is bought, the acquirer might use the target company’s cash to settle a portion of the assumed debt, the amount of debt is modified by deducting cash from it. The book value of debt we can use instead of the debt’s market value if the debt’s market value is unclear.

3. Stock with Preferred Status. Preferred stocks are a type of hybrid security that has both equity and debt characteristics. Because they pay a predetermined amount of dividends and prioritize asset and earning claims more than ordinary stock, they are more like debt in this scenario.

4. Minority (non-controlling) interest. The percentage of a subsidiary that is not held by the parent business is known as a non-controlling interest (who owns a greater than 50 percent but less than 100 percent position in the subsidiary). The financial statements of this subsidiary are combined into the parent company’s financial performance.

5. Money and its Equivalents. In a company’s financial statement, this is the most liquid asset. Short-term investments, marketable securities, commercial paper, and money market funds are examples of cash equivalents. We deduct this amount from EV since it lowers the target company’s acquisition expenses. The acquirer is expected to utilize the funds to pay off a portion of the potential purchase price right away. In addition, it would be used to pay a dividend or buy back debt right away.

Enterprise value vs. market cap

The market worth of a corporation may be measured in two ways: enterprise value and market capitalization. The two computations aren’t the same, and the names aren’t interchangeable either. However, each provides a sense of a company’s total worth as well as a figure that we can use to compare a company’s worth to that of its competitors in the same industry. We use both of these figures are routinely to assess a reasonable price for a company’s stock.

Market capitalization, often known as market cap, is a straightforward method of determining a company’s size and worth and its prospective growth rate and risk outlook. The entire value of all outstanding shares of a company’s stock we know as the market cap. We calculate it by multiplying the stock’s current share price by the number of outstanding shares. The graph is one of the primary figures that appears beside every stock published on a financial news or broker’s website.

The market capitalization of a stock can also give you a sense of how much growth and risk you can expect from it. We use the market capitalization of a company to classify it. Large-, mid-, and small-cap are the three major classifications. Large-cap corporations are often well-established, profitable businesses with consistent income streams. Their progress may be sluggish but constant over time. As a result, their pricing fluctuations are less erratic than those of smaller businesses.

Enterprise value vs. equity value

In a merger or acquisition, a firm may assess in two ways: enterprise value and equity value. We use both of them to value or sell a firm, but they provide significantly different perspectives. While enterprise value, like a balance sheet, provides an accurate measurement of a company’s whole current worth. Equity value provides a picture of both present and possible future value.

In most circumstances, a stock market investor or someone looking to purchase a controlling stake in a firm will use an enterprise value to determine the worth quickly and easily. On the other hand, owners and present shareholders frequently utilize equity value to guide future decisions.