Enterprise Value

What Is Enterprise Value (EV)?

Enterprise value is a measure of a company’s total value, often used as a more comprehensive alternative to equity market capitalization.

EV includes both debt and equity in its calculation, giving investors and other market participants a more complete picture of a company’s worth.

Enterprise value is calculated by adding up a company’s market capitalization, outstanding debt, and any minority interests, then subtracting out any cash or cash equivalents on the balance sheet. This number can give you a good idea of what it would cost to buy an entire company outright.

Enterprise value is sometimes referred to as “total enterprise value” (TEV) or “corporate value”.

It’s also worth noting that enterprise value and market capitalization are not the same thing, though they are often used interchangeably.

Market cap only takes into account the value of a company’s outstanding equity, while enterprise value also takes debt and minority interests into account.

 

Why Is Enterprise Value Important?

Enterprise value is important because it gives you a more complete picture of a company’s worth than market capitalization alone.

By including both debt and equity in the calculation, enterprise value gives you a better idea of what it would actually cost to buy a company.

This metric can be particularly useful when comparing companies across different sectors.

For example, two companies might have the same market capitalization, but one might have much more debt than the other. In this case, the company with more debt would have a higher enterprise value.

Enterprise value can also be used to compare companies of different sizes.

For example, a small company with a market cap of $100 million and no debt would have an enterprise value of $100 million.

Meanwhile, a large company with a market cap of $10 billion and $5 billion in debt would have an enterprise value of $15 billion.

In general, enterprise value is a more comprehensive metric than market capitalization, and it can be useful for comparing companies across different sectors and of different sizes.

 

Enterprise Value vs. Equity Value: What’s the Difference?

It’s worth noting that enterprise value and equity value are not the same thing, though they are often used interchangeably.

Equity value is simply the market capitalization of a company’s outstanding shares. Enterprise value also takes debt and minority interests into account.

Here’s a quick example to illustrate the difference between enterprise value and equity value:

Let’s say Company XYZ has 10 million shares outstanding, and each share is trading at $10. This gives XYZ a market cap of $100 million. Now let’s say that XYZ also has $50 million in debt and $20 million in cash. This gives XYZ an enterprise value of $130 million (($100M + $50M) – $20M).

As you can see, enterprise value is simply the market cap plus debt, minus cash (a non-operating asset). Equity value, on the other hand, is just the market cap.

Enterprise Value vs Equity Value

 

How to Use Enterprise Value to Compare Companies

As we mentioned earlier, enterprise value can be useful for comparing companies across different sectors and of different sizes.

Here are a few examples of how you might use enterprise value to compare companies:

To compare two companies in the same sector

Let’s say you’re trying to decide between Company ABC and Company XYZ, which both have the same amount of earnings.

Both companies have a market cap of $1 billion, but ABC has $500 million in debt while XYZ has no debt.

This gives ABC an enterprise value of $1.5 billion (($1B + $500M) – $0), while XYZ has an enterprise value of $1B ($1B + $0 – $0).

In this case, you might prefer to invest in XYZ because it has a lower enterprise value.

In other words, it generates earnings more efficiently given it has a lower capital base.

If both companies have $100 million in EBITDA per year, ABC would have an EV/EBITDA ratio of 15x while XYZ would have an EV/EBITDA ratio of 10x.

To compare two companies of different sizes

Let’s say you’re trying to decide between Company ABC and Company XYZ.

ABC has a market cap of $1 billion, while XYZ has a market cap of $10 billion.

However, ABC also has $500 million in debt while XYZ only has $50 million in debt.

This gives ABC an enterprise value of $1.5 billion (($1B + $500M) – $0), while XYZ has an enterprise value of $10.05 billion (($10B + $50M) – $0).

If ABC had $100 million in EBITDA per year and XYZ had $1 billion in EBITDA per year, they would seem to be similarly valued based on their market caps.

However, when comparing to the appropriate metric (enterprise value), we can see that XYZ is actually trading at the lower multiple – $10.05 billion divided by $1 billion – 10.05x while ABC is trading at a 15x EBITDA multiple.

To compare two companies of different sizes and in different sectors

Let’s say you’re trying to decide between Company ABC, which is in the tech sector, and Company XYZ, which is in the energy sector.

In this case, comparing EBITDA multiples – or other valuation multiples – can be apples to oranges because they’re in different industries.

The tech company may be growing faster. Moreover, you may want to compare different multiples instead.

Many tech companies have low EBITDA relative to their enterprise value because of their growth. And many energy companies may want to be evaluated using different multiples such as EV/EBITDAX.

We’ll cover these more below.

 

Enterprise Value (EV) Multiples

Enterprise Value-to-Sales (EV/Sales)

The EV/Sales ratio, for example, is simply the enterprise value of a company divided by its sales.

This ratio can be useful for comparing companies in different sectors because it takes into account the different sizes of companies.

For example, a company with $1 billion in sales and an enterprise value of $10 billion would have an EV/Sales ratio of 10x.

A company with $100 million in sales and an enterprise value of $1 billion would also have an EV/Sales ratio of 10x.

However, the first company would be considered more expensive because it would require a higher investment to achieve the same level of sales.

The EV/Sales ratio can also be used to compare companies within the same sector.

For example, Company A might have an EV/Sales ratio of 8x while Company B has a ratio of 12x. This means that Company B is more expensive relative to its sales but it can also be justified due to a higher growth rate.

Finally, the EV/Sales ratio can be used to compare a company to its peers or the market. For example, if the average EV/Sales ratio in a sector is 10x and Company A has a ratio of 8x, then Company A might be considered undervalued.

However, it is important to remember that the EV/Sales ratio is just one metric and should not be used in isolation. It is always important to consider a range of factors before making any investment decisions.

Enterprise Value-to-EBIT (EV/EBIT)

The enterprise value-to-EBIT ratio (EV/EBIT) is a measure of a company’s value that controls for interest and taxes (e.g., allows you to control for different capital structures and jurisdictions).

The EV/EBIT ratio is calculated by dividing a company’s enterprise value by its EBIT.

A high EV/EBIT ratio indicates that a company is highly valued and may be overvalued. A low EV/EBIT ratio indicates that a company is undervalued.

The EV/EBIT ratio is often used in conjunction with other valuation ratios, such as the price-to-earnings ratio (P/E), to get a more complete picture of a company’s valuation.

Enterprise Value-to-EBITDA (EV/EBITDA)

The EV/EBITDA ratio is another popular enterprise value ratio. This ratio is simply the enterprise value of a company divided by its EBITDA. This ratio can be useful for comparing companies because it takes into account a company’s debt and cash.

A company with a lower EV/EBITDA ratio is generally considered to be more attractive because it is trading at a lower multiple of its earnings.

A company with a higher EV/EBITDA ratio is generally considered to be less attractive because it is trading at a higher multiple of its earnings.

There are a few things to keep in mind when using the EV/EBITDA ratio.

First, this ratio does not take into account a company’s capital structure.

This means that two companies could have the same EV/EBITDA ratio but different levels of debt and equity. As such, you should always look at a company’s balance sheet before making any investment decisions.

Second, EBITDA can be manipulated by management. This is because EBITDA does not take into account things like interest expense and taxes. As such, you should always look at a company’s cash flow statement as well to better determine how much it might actually be making.

The EV/EBITDA ratio can be a useful tool for comparing companies. However, you should always keep in mind the limitations of this ratio before making any investment decisions.

What Is Considered a Healthy EV/EBITDA?

A “healthy” enterprise value to EBITDA ratio will vary from industry to industry. For example, a company in the tech sector may have a higher EV/EBITDA ratio than a company in the retail sector.

However, as a general rule of thumb, a company with an EV/EBITDA ratio below 10x is considered to be a reasonable value that might be worth exploring as an investment, while a company with an EV/EBITDA ratio above 10x is considered to be on the higher side.

When private equity looks at investments of mature firms, they often look for EV/EBITDA ratios of less than 8x, though obviously the screening process and how they find buyout candidates is much more involved.

Of course, this is just a general guideline, and there are many other factors that should be considered when assessing the value of a company.


What are some common EV/EBITDA multiples by industry?

Industry EBITDA Average Multiple
Healthcare information and technology 20x+
Airlines 6x
Drugs, biotechnology 40x+
Hotels and casinos 15x
Retail, general 14x
Retail, food 9x
Utilities, excluding water 12x
Homebuilding 10x
Medical equipment and supplies 20x+
Oil and gas, exploration and production 5x
Telecom, equipment (phones & handheld devices) 14x
Professional information services (big data) 20x+
Software, system & application 20x+
Wireless telecommunications services 7x

Enterprise Value-to-Free Cash Flow (EV/FCF)

The EV/FCF ratio is simply the enterprise value of a company divided by its free cash flow. The enterprise value is the market capitalization plus debt, minority interest, and preferred shares, minus total cash and cash equivalents.

This ratio is used to determine whether a company is undervalued or overvalued. A lower EV/FCF ratio indicates that a company is undervalued and a higher EV/FCF ratio indicates that a company is overvalued.

The formula for calculating the EV/FCF ratio is as follows:

 

EV/FCF = Enterprise Value / Free Cash Flow

 

To calculate the enterprise value of a company, you will need to use the following formula:

 

Enterprise Value = Market Capitalization + Debt – Minority Interest – Preferred Shares + Total Cash and Cash Equivalents

 

And to calculate the free cash flow, you will need to use this formula:

 

Free Cash Flow = Net Income + Depreciation & Amortization – Change in Working Capital – Capital Expenditures

 

The EV/FCF ratio is a useful tool for valuation because it takes into account a company’s debt and cash levels.

This is important because a company with a lot of debt may not be as undervalued as you think, and a company with a lot of cash may be overvalued.

Enterprise Value-to-EBITDAR (EV/EBITDAR)

The EV/EBITDAR multiple is a valuation metric used to compare the relative value of companies in the same industry, typically real estate.

The numerator, EV, is the sum of a company’s market capitalization, debt, and preferred equity minus cash and investments. The denominator, EBITDAR, is earnings before interest, taxes, depreciation, amortization, and rent.

This metric is often used by investors to compare companies within the same industry because it adjusts for differences in capital structure and accounting practices.

Enterprise Value-to-EBITDAX (EV/EBITDAX)

The enterprise value-to-EBITDAX ratio (EV/EBITDAX) is a popular valuation metric used to measure the relative value of a company in the oil and gas industry (O&G).

The EV/EBITDAX ratio is calculated by dividing a company’s EV by its EBITDAX.

EBITDAX is a measure of a company’s earnings before interest, taxes, depreciation, amortization, and exploration expenses.

The EV/EBITDAX ratio is used to compare the valuations of companies in the same industry because it takes into account companies’ different exploration expenses.

The EV/EBITDAX ratio is often used by O&G analysts and investors because it provides a more accurate picture of a company’s value than the traditional price-to-earnings (P/E) ratio or EV/EBITDA.

The EV/EBITDAX ratio is also useful for comparing companies with different capital structures.

Enterprise Value-to-2P (EV/2P)

The EV/2P ratio is a measure of an oil and gas company’s value relative to its proven and probable (2P) reserves.

The ratio is calculated as the market value of all of a company’s equity plus debt minus cash, divided by the after-tax present value of its 2P reserves.

The EV/2P ratio is used by analysts to compare the relative value of different oil and gas companies.

A higher EV/2P ratio indicates that a company is trading at a premium to its underlying 2P reserves.

A lower EV/2P ratio indicates that a company is trading at a discount to its 2P reserves.

The EV/2P ratio is also used by analysts to identify potential takeover targets.

A company with a high EV/2P ratio may be seen as an attractive target for another oil and gas company looking to acquire new reserves.

These are just a few of the most common enterprise value ratios. As you can see, enterprise value can be divided by a number of different metrics to come up with a variety of different ratios.

 

Why Isn’t Enterprise Value Used for Banks?

Banks are different from other businesses because they rely heavily on debt to finance their activities.

This means that the value of a bank’s assets and liabilities must be considered together to get a true picture of the institution’s worth.

There are several reasons why enterprise value is not used to value banks.

First, banks typically have very complex balance sheets with numerous asset and liability categories. This makes it difficult to calculate an accurate enterprise value for the business.

Second, the value of a bank’s assets can fluctuate rapidly due to changes in interest rates or credit conditions. This makes it hard to determine what the “true” value of the bank’s assets really is.

Finally, banks are regulated institutions that are subject to strict rules and regulations. This makes it difficult to compare them to other businesses when valuing them using enterprise value.

In conclusion, enterprise value is not typically used to valuation banks due to the complexity of their balance sheets, the volatility of their assets, and the regulatory environment they operate in.

 

Enterprise Value – FAQs

What Is the Difference Between Enterprise Value and Market Capitalization?

The enterprise value (EV) of a company is its market capitalization plus its debt minus any cash on its balance sheet.

The market capitalization (market cap) of a company is the market value of its outstanding shares.

The enterprise value of a company is therefore its market capitalization plus debt minus cash.

However, there are some important differences between enterprise value and market capitalization.

First, enterprise value includes all forms of debt, while market capitalization only includes equity.

Second, enterprise value also takes into account any cash on the balance sheet, while market capitalization does not.

Third, enterprise value can be used to compare companies of different sizes and different types (e.g., private vs public) EV valuation multiples, while market capitalization is usually only used to compare companies within the same sector.

So, what is the difference between enterprise value and market capitalization?

The main difference is that enterprise value includes all forms of debt and cash, while market capitalization only includes equity.

How to Find Enterprise Value?

There are a few different ways to calculate enterprise value.

The most common way is to add up the market value of all outstanding shares, the market value of all debt, then subtract any cash on the balance sheet.

Finally, enterprise value can also be calculated using a company’s enterprise multiple (EV/EBITDA). This ratio takes into account a company’s earnings before interest, tax, depreciation, and amortization (EBITDA) and its enterprise value.

If you know its EBITDA multiple and its EBITDA, then you can know its enterprise value by multiplying the two together.

Why Do You Subtract Cash From Enterprise Value?

The enterprise value of a company is its market capitalization plus debt minus cash. The reason cash is subtracted from enterprise value is that it is not considered an “operating asset”.

This means that the cash can be used to pay off debts or be returned to shareholders, without affecting the company’s ability to generate profits.

In other words, enterprise value is a measure of a company’s operating assets and liabilities, while cash is a non-operating asset.

Why Is Enterprise Value Important?

Enterprise value is important because it provides a more accurate picture of a company’s true worth.

This is because enterprise value includes all forms of debt and cash, while market capitalization only includes equity.

How to Get From Enterprise Value to Equity Value?

The equity value of a company is its enterprise value minus its debt and any preferred shares or minority interests.

This can be calculated by subtracting the market value of all outstanding debt, the market value of all preferred shares, and any cash on the balance sheet from the enterprise value.

Why Is Enterprise Value More Accurate Than Market Cap?

Enterprise value is more accurate as an overall valuation marker than market capitalization because it takes into account all forms of debt and cash, while market capitalization only includes equity.

 

Summary – Enterprise Value

Enterprise value is a comprehensive metric that takes into account a company’s market capitalization, debt, and cash. This makes it a useful tool for comparing companies across different sectors and of different sizes.

Equity value is simply the market capitalization of a company’s outstanding shares and does not take debt or cash into account.

It’s important to remember that enterprise value is just one metric you can use to compare companies. Be sure to look at a variety of factors before making any investment decisions.

 

 

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