# What is Enterprise Value?

Enterprise value measures the total value of a company’s equity and debt.

EV is a measure used by financial analysts who care about a company’s capital structure and is an alternative to market capitalization, which simply measures the value of a company’s equity.

## Calculating Enterprise Value

To calculate enterprise value, you must take a company’s market capitalization (share price multiplied by shares outstanding), add its total debt (short term plus long term), and subtract cash and cash equivalents.

### Step 1

For this example, we will be using information from the graphic below.

First, calculate market cap by multiplying the company’s share price of \$150.00 by its total shares outstanding of 4.6 million to arrive at \$690 million.

### Step 2

Next, calculate the company’s total debt by adding its short-term debt of \$50 million to its long-term debt of \$90 million—this equals \$140 million.

Add cash to cash equivalents to get \$21 million in total cash and cash equivalents.

### Step 3

Finally, run these numbers through the provided formula.

\$809 million EV = \$690 million Market Cap + \$140 million Total Debt - \$21 million Cash and Cash Equivalents.

The graphic below illustrates an example of calculating enterprise value for XYZ Corp.

Click or tap the image above to enlarge

Note that in the above example EV is a larger number than market capitalization because the company has a positive net debt balance (more debt than cash).

However, if the company had a negative net debt balance (more cash than debt), then market cap would be larger than EV.

All the data needed to calculate enterprise value, except for the current stock price, can be found in a company’s most recent financial report filed with the Securities and Exchange Commission.

Current share prices can be quoted online or through a brokerage account.

## Why Use Enterprise Value?

EV is useful because it shows the total size of a business including its outstanding debt.

For an investor evaluating a company, it’s useful to know if the company has a significant amount of debt outstanding; if its enterprise value is much larger than its equity value, this indicates that the company is primarily financed with debt capital.

Depending on the company, a large amount of outstanding debt could be an indicator of a risky investment.

Enterprise value is also referred to as “firm value” because it paints a full picture of a business’s size.

If a company is sold, the acquirer is responsible for both the equity and the debt. Therefore, acquirers primarily focus on enterprise value.

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