Enterprise Value

Enterprise Value (EV) attemps to measure the value of a company's business rather than the company. It answers the question "what would it cost to buy this business free of its debt and other liablities".

The calculation:

1. the market capitalisation of the company

2. the value of its dept financing (bonds and bank loans, not items such as trade creditors)

3. the value of other liabilities such as a deficit in the co's pension fund

4. and subtracting the value liquid assets such as cash and investments.

Think of enterprise value as the theoretical takeover price for the company. In the event of a buyout, an acquirer would have to take on the company's debt, but would pocket its cash. EV differs significantly from simple market capitalization in several ways, and many consider it to be a more accurate representation of a firm's value. The value of a firm's debt, for example, would need to be paid by the buyer when taking over a company, and thus EV provides a much more accurate takeover valuation because it includes debt in its value calculation