Today, we are going to review the enterprise value (EV) calculator. Thanks to this amazing tool, you’ll be able to compute enterprise value with just a few simple clicks. This can help you measure the total value of a company in a matter of seconds.
But before starting to use our calculator, you should understand the overall concept of enterprise value. We are here to help. Apart from explaining the enterprise value (EV) formula, we will also provide an example of this calculation for better understanding.
Once you learn how the enterprise value is calculated, you will be able to apply this method and determine the total value of any company. Without further ado, let’s discover everything you need to know about enterprise valuation.
What Does Enterprise Value Mean?
Enterprise value is intended to measure a value of a firm or company in total. This method doesn’t only consider market capitalization, debt, but it also takes into account preferred shares and minority interest. That makes it a reliable method for measuring enterprise value.
When it comes to preferred shares, it is necessary to decrease this value by the company’s total cash to get the appropriate result. This implies the company as a whole and it is often deemed to be a theoretical purchase price.
Basically, enterprise value is a measure of a company’s worth. This is the value of a company’s equity, debt, and other non-equity securities. There are a few different ways to calculate this measure. For example, the enterprise value can be calculated by multiplying the market capitalization by the number of shares outstanding.
It is also calculated by looking at the enterprise value of the company and then subtracting the total debt from it or by subtracting the total liabilities from the market capitalization. This calculation helps investors to know how much they are investing in a company. In addition, enterprise value is calculated by subtracting all liabilities from the market cap. The market cap is calculated by multiplying shares outstanding by the current share price.
Other Things You Should Consider when Calculating Enterprise Value
Okay, we have seen the basic things about enterprise value to help you get a better idea of what it stands for. Let’s discover other important facts about this measure you should also take into consideration when calculating the enterprise value of a company.
It is worth noting that the market capitalization of a company determines its value. Hence, it is necessary to multiply its price by outstanding shares. The enterprise value provides a wider view, which makes it more accurate.
For instance, debts are included among other things. This matters for many potential purchasers and investors. In the event of an acquisition, they are required to repay the debt of the company. Therefore, the enterprise value can help them decide whether or not to purchase a certain firm.
Moreover, cash equivalents and cash (funds) are also included in the enterprise value. This sum can be taken over by the potential buyer to get the debts covered in the event of an acquisition. That’s why the overall price is reduced by cash.
EBITDA multiple – a financial valuation ratio that is used to measure a company’s ROI (return on investment) – is another indicator that is associated with the enterprise value. It is utilized to compare the operating earnings of companies to their theoretical market values.
Formula: How to Calculate Enterprise Value?
You’ve found out more about the enterprise value in the previous sections and learned how it’s used. Now it’s time to see how it is calculated. All you need to do is use the following formula:
EV = Market Capitalization + Preferred Stock + Outstanding Debt + Minority Interest – Cash & Cash Equivalents
Where:
- Market capitalization is the market value of all the outstanding shares owned by a company. It is the total market value of all of a public company’s outstanding shares. In order to calculate this number, you need to multiply the current share price by the total number of shares outstanding.
- Preferred shares are a type of stock that pays a fixed dividend. The dividend is usually higher than the dividend on common shares, and the holders of preferred shares have priority over common shareholders in the event that a company goes bankrupt. The most important thing to know about preferred shares is that they are not as risky as common stock. Preferred stocks are also more likely to pay higher dividends than common stocks.
- Minority interest represents less than 50 percent of the equity of the subsidiary that another company or investor owns. Minorities are often overlooked in society, but that is not the case in the realm of advertising. They are a growing market and have a lot of buying power. The use cases for minority interest is to show them as aspirational figures and present them as people who have accomplished something worth looking up to.
- Outstanding debt is the debt that the purchaser is supposed to absorb or reduce.
- Cash & cash equivalents are possessions of the acquired company.
As you can see, the enterprise value formula comprises a few components, including market capitalization, preferred shares/stock, minority interest, debt, as well as cash and cash equivalents. Now that you know what each element of the formula stands for, you should not have a hard time calculating the enterprise value.
Example
To help you understand how this calculation is used in practice, we will provide an example. Let’s calculate the enterprise value (EV) for the following values:
- Market Capitalization: $100,000
- Preferred Stock: $1,000
- Outstanding Debt: $1,000
- Minority Interest: $1,000
- Cash & Cash Equivalents: $20,000
When applying the EV formula, the enterprise value will be as follows:
EV = $100,000 + $1,000 + $1,000 + $1,000 – $20,000
EV = $83,000
So, in this example, the enterprise value is $83,000. We hope you will now know how to calculate EV by hand. However, it is best to use our calculator to save time and ensure that the results are always correct. Give it a try!