Enterprise value is often considered by investors valuing stock and represents how much a business is worth or the theoretical takeover price. Find out how to calculate this figure and what it really means.
- Step 1: Look at two companies with the same market cap and no debt. One, however, has $10 million in cash while the other has no real cash or cash equivalents. If you bought the first company for $50 million, it would actually have cost you only $40 million, since you'll also get the $10 million cash.
- FACT: Investors lost more than $60 billion in the accounting scandal at the root of the unprecedented collapse of Enron in 2001.
- Step 2: Understand the concept of enterprise value by comparing two companies with equal market cap values. If one has no debt and the other is debt-heavy, you wouldn't want to pay the same price, since you'll have to pay interest over time on the debt of the latter company.
- TIP: Investments are also referred to as cash equivalents.
- Step 3: Add total debt to market cap. To find total debt, add long- and short-term debt together, which can be found on the company's balance sheet.
- Step 4: Subtract cash and investments, also listed on the balance sheet, from the previous total, to find enterprise value.
- Step 5: Find the firm's market capitalization. Market cap, or equity value, is found by multiplying the current share price by the total number of shares outstanding. For example, if a company has 25 million shares outstanding, each with a market value of $100, the company's market capitalization is $2.5 billion.