Enterprise Value Calculator

Enterprise value is the true cost of acquiring an entire company and includes more than just the cost to buy the stock. It's calculated by adding a company's market cap plus any debt or other obligations that the buyer will assume, then subtracting cash on hand in bank accounts. The result is a metric used by banks, analysts and potential buyers when pure market value alone doesn't provide enough information.

If you input five values the tool will instantly calculate enterprise value. If a field is left blank then the tool will work backwards to calculate that value which allows for bridge analysis to find equity value. By ticking the valuation multiples option you can see what multiple of Enterprise Value (EV) compared to EBITDA, EBIT and Sales.

What is a company's value?

Market capitalization only tells you the value of the stock. Enterprise value represents the total worth of the business operation including debt. Even if all shares were purchased at market price, debts to creditors must be paid off, preferred shareholders must be paid out and minority shareholders' interests must be accounted for.

The cash component reduces some of these costs because it is transferred along with the company on closing. This is why enterprise value is considered to be independent of capital structure. Two companies with identical business operations may pursue different financing strategies, but end up with the same enterprise value (EV). By eliminating the choice of financing, one can compare actual operating results directly.

Formula for calculating company value:

Each of the individual points represents a claim on the business. The market value is the equity stake, debt is obligations to creditors, while preferred shares and minority interests are other ownership claims. Conversely, only cash has to be deducted as it's something that the buyer will need again. Many companies have no preferred shares or minority interests so these two items are usually zero.

If we substitute the example values, it results in this: If you add 3,000 million to 5,900 million and subtract 1,500 million, then the enterprise value is 7,400 million, or 7.4 billion. A person who buys shares for 5.9 billion also assumes debts of 3 billion, but since part of that is offset by 1.5 billion in cash, the actual cost is 7.4 billion.

Why is cash being withdrawn?

When you buy a company, you also get its bank accounts. If the target has 20 million in cash and the offer is 100 million, that money belongs to the buyer and can be used to pay down debt assumed as part of the acquisition, so the actual outlay is 80 million. The net debt shown on the bottom line will exactly equal total debt minus cash.

Valuation factors based on enterprise value (EV)

Because enterprise value already includes debt and cash, it is a good numerator for comparing companies. The denominator measures the performance of the business that accrues to all capital providers so that firms with different capital structures can be fairly compared.

The EV/EBITDA ratio is the most commonly used valuation metric and is particularly suitable for capital intensive companies where reported earnings are heavily influenced by depreciation. The EV/EBIT takes into account depreciation, while the EV/Sales is appropriate for companies that generate low profits or losses. It is not possible to combine a pure profit ratio such as P/E with enterprise value (EV) because net income accrues exclusively to shareholders whereas enterprise value accounts for all investor groups.

A valuation ratio only becomes meaningful when it is compared to similar companies. An EV/EBITDA of 6 might be considered relatively cheap for a software company, while it would likely seem very expensive for a retailing concern. So it's important always to compare within the same industry and not make cross-industry comparisons.

Interpretation of Enterprise Value (EV) relative to market cap:

The difference between enterprise value and market capitalization gives a quick overview of the level of debt in an organization. If the enterprise value is below the market cap, it means that the company has more cash than debt and is in a net cash position. If the enterprise value is significantly above the market cap, this indicates that the company has significant debt that any potential buyer would have to take on. In most industries, a moderate premium is common. With a very high premium, the level of debt should be examined closely relative to other companies.