Enterprise Value

Enterprise value tries to capture what it would cost to buy an entire company, not just its shares. A buyer would have to pay for the equity, but would also take on the company's debt, while getting its cash. The basic formula is market capitalization plus total debt minus cash and cash equivalents. More detailed versions also add preferred stock and minority interests.

Example: a company has a market cap of $8 billion, debt of $3 billion and cash of $1 billion. Its enterprise value is $10 billion.

EV is useful for comparing companies with different capital structures. Two companies may have the same market cap, but if one has heavy debt and the other has lots of cash, their enterprise values, and the real price of owning them, differ significantly.

Enterprise value is the basis of several valuation ratios, such as EV/EBITDA, EV/sales and EV/EBIT. These are often preferred to price-based ratios in industry comparisons and in mergers and acquisitions.

A company with more cash than its market cap and little debt can even have a negative enterprise value, which is rare and usually signals special circumstances.