Definition
Enterprise value, total enterprise value, or firm value is an economic measure reflecting the market value of a business. It is a sum of claims by all claimants: creditors and shareholders. Enterprise value is one of the fundamental metrics used in business valuation, financial modeling, accounting, portfolio analysis, and risk analysis.
Enterprise Value
Enterprise Value, or EV as it is more popularly known, is a measurement of a company’s total value.
EV is usually used because it is a more wide-ranging substitute to equity market capitalization. The overall market capitalization of a company can simplistically be described in the equation (Sp x S) where Sp is the share price multiplied by the number of total outstanding shares of a company.
Enterprise value (EV) is determined as market capitalization with the addition of minority interest, debt as well as preferred shares, from which are subtracted total cash and all other cash equivalents.
EV Equation
Therefore the EV equation may be defined as:
EV = market value of common stock + market value of preferred equity + market value of debt + minority interest – cash and investments.
EV usage
It is used by and large to determine the overall market value of a company and is also widely considered to be a (theoretical) market price of a company. In the event of an acquisition or even a hostile takeover, the purchaser would always determine the EV before making his/her bid. In fact Enterprise Value is one of the most primary metrics used in risk analysis, business valuation, financial modeling, portfolio analysis along with a veritable host of other real world financial applications.
An easy way to understand Enterprise valuation is to consider the purchase of an entire corporation. Quite simply EV is what a person or a corporate entity will have to pay when they purchase a company.
EV is said to be in the negative if the concerned may hold very high amounts of cash without those liquid assets being reflected in the market value of the shares themselves. This is because liquid cash is deducted since it tends to reduce the total net cost to any potential buyer. Here it is immaterial whether the cash is used to pay debts or issue dividends to the share holders.
Essential considerations
When determining EV many essential financial considerations should be included such as environmental provisions. Abandonment provisions, Employee stock options, pension liabilities and so on and so forth since they do have claims on the worth and assets of the company.
Further Reading
- An Empirical Study on Relation of Corporate Governance and Enterprise Value [J] – en.cnki.com.cn [PDF]
- Study on relation of internal control and enterprise value: an empirical analysis from Shanghai and Shenzhen stock markets – en.cnki.com.cn [PDF]
- Added value, enterprise value and competitive advantage – www.emerald.com [PDF]
- The enterprise performance evaluation for maximizing the enterprise value based on stakeholder theory [J] – en.cnki.com.cn [PDF]
- The choice of methodological approaches to the estimation of enterprise value in terms of management system goals – search.proquest.com [PDF]
- Studies on the Enterprise Value Network Based on Modularity and Its Competence [J] – en.cnki.com.cn [PDF]
- Research on Enterprise Value Reporting and Wealth Change Reporting [J] – en.cnki.com.cn [PDF]
- Free cash flow, enterprise value, and investor caution – jpe.pm-research.com [PDF]
- Strategic fit: Key to growing enterprise value through organizational capital – www.sciencedirect.com [PDF]
