Short definition: Enterprise value (EV) is a measure of a company’s total value, often used as an alternative to market capitalization. It represents the theoretical takeover price of a company.
Explanation: EV includes a company’s market capitalization (the value of its outstanding shares), as well as its debt and cash. It is calculated as follows:
EV = Market Capitalization + Total Debt – Cash and Cash Equivalents
Example: If a company has a market capitalization of $1 billion, total debt of $200 million, and cash and cash equivalents of $50 million, its enterprise value would be $1.15 billion.
Additional information (optional): EV is often used to compare the valuations of companies with different capital structures. It is also a key metric in many financial ratios, such as EV/EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortization).