September 15, 2020

How to Calculate Enterprise Value

How to Calculate Enterprise Value

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Enterprise value or EV is a financial measurement calculating the total monetary value of a business in the marketplace. Enterprise value is not the current market price but what the true value of the business is based on its assets and cash flow. The EV is the difference between the outstanding debt and the assets along with the value of the ongoing cash flow of profits generated from the business. 

Enterprise value is a fundamental filter and quantification of the value of a business using a model of their business, accounting principles, valuing their portfolio of assets, and a risk analysis of the the exposure their business has to competitors and technological disruptions. Geographic location and political risk can also be considered for enterprise value. 

Enterprise value is a more all encompassing quantification of true business value than market capitalization alone, as it only shows the value of  total common equity price. EV tries to show the full worth of opportunity and the danger of risk in the current operations of a business and can change as external or internal market conditions trend for the better or worse. Most financial analysts that set enterprise values use a price range in their calculations so the buyer, seller, or investor can choose the level they are most comfortable with. 

How to calculate enterprise value:

Enterprise value = common equity at market value (market capitalization)
+ debt at market value all long-term and short-term interest-bearing liabilities
+ any minority interest stakes at market value
+ any preferred equity at market value
+ unfunded pension liabilities or legacy debt 
– value of associate companies
– cash and cash equivalents.

Enterprise value is what a business is thought to be worth regardless of current market price. This is one of the tools that value investors use to buy stocks that are a bargain versus the value of the underlying business. 

“Price is what you pay. Value is what you get.” – Warren Buffett

How to Calculate Enterprise Value