Enterprise value (EV)
ValuationDefinition
The true cost to buy an entire company, assuming you take on its debt and pocket its cash. Start with the market cap (share price times total shares), add the company's debt, then subtract its cash. EV answers the question 'if I wanted to buy the whole thing today, what would it actually cost me?'
EV is a better yardstick than market cap when comparing companies, because it accounts for very different capital structures. Two companies with the same market cap can have wildly different EVs if one is loaded with debt and the other is sitting on a cash pile.
EV is a better yardstick than market cap when comparing companies, because it accounts for very different capital structures. Two companies with the same market cap can have wildly different EVs if one is loaded with debt and the other is sitting on a cash pile.
Formula
EV = Market cap + Total debt minus Cash and equivalents
Example
Company A has a $100M market cap, $50M in debt, and $20M in cash. Its EV is $130M. Company B also has a $100M market cap, but with $10M in debt and $40M in cash. Its EV is just $70M. Same market cap, very different price to actually buy.