Enterprise Value (EV)

Enterprise Value (EV) is the total economic value of a company, calculated as market capitalization plus total debt minus cash and cash equivalents. It represents approximately what an acquirer would need to pay to purchase the entire company outright.

Formula

Enterprise Value = Market Cap + Total Debt - Cash and Cash Equivalents

This is the price an acquirer would pay for the equity plus assume or pay off the debt.

Example

Apple (AAPL) has a market cap of $3 trillion, $100 billion in debt, and $50 billion in cash. Enterprise Value = 3T + 100B - 50B = $3.05 trillion. This is what a buyer would pay to own AAPL's entire business.

How to Interpret It

• EV vs. Market Cap: EV includes debt (obligations the buyer would assume) and subtracts cash (the buyer would get). For debt-heavy companies, EV is much higher than market cap.
• EV for comparisons: EV is better than market cap for comparing companies with different capital structures. Netflix (low debt) and Ford (high debt) should be compared using EV, not market cap.
• Acquisition benchmark: When a company is acquired, the price typically relates to EV, not market cap.
• EV/EBITDA and EV/Revenue: Enterprise value is used in these valuation ratios, making it capital-structure neutral.
• Cash-rich companies: Apple and Microsoft have large cash positions, so their EV is lower than their market cap.

Limitations

• EV assumes the buyer takes on all debt at face value and gets all cash; in reality, debt holders might negotiate, and not all cash may be accessible.
• Off-balance-sheet obligations (operating leases pre-2019, pension liabilities, contingent liabilities) aren't fully captured.
• A company with high debt and low equity (high leverage) has high EV but low market cap, which can seem odd to novice investors.
• EV doesn't account for preferred stock or minority interests in subsidiaries; these should be added for a true enterprise value.

Related Terms

• Market Cap — stock price times share count
• EV/EBITDA — enterprise value divided by EBITDA, a key valuation metric
• Debt — obligations of the company
• Valuation — what a company is worth