Enterprise Value (EV)
Enterprise value (EV) is a company’s market capitalization plus its net debt (total debt minus cash). It represents the full cost of buying the entire business: acquire all the shares, inherit all the debts, pocket the cash. It is the number acquirers actually pay.
The math
A company with a 2 billion dollar market cap and 3 billion of net debt has an enterprise value of 5 billion. The stock market’s price tag covers only 40 percent of what the business really costs.
Reverse the balance sheet and the picture flips: a 2 billion market cap with 500 million of net cash gives an EV of 1.5 billion, and the buyer effectively gets a rebate.
| Leveraged | Cash-rich | |
|---|---|---|
| Market cap | $2.0B | $2.0B |
| Net debt | + $3.0B | net cash $0.5B |
| Enterprise value | $5.0B | $1.5B |
The trap
Screening on price-based multiples and concluding a leveraged company is cheap. A low P/E sitting on a mountain of debt is often just risk wearing a discount costume: the equity is cheap because it is the thin slice left after lenders are served.
EV-based multiples like EV/EBITDA exist precisely to catch what price multiples miss.
The move
Use EV whenever you compare companies with different balance sheets, which is almost always. Compute the EV to market cap gap as a quick leverage read: the wider it is, the more of the business belongs to creditors.
And for cash-rich companies, check how much of your purchase price is effectively refunded in cash before judging the multiple expensive.