Enterprise ValueEV
Enterprise value is a company’s market capitalisation plus its debt minus its cash. It estimates what it would cost to buy the whole business, and allows comparisons between companies with different amounts of debt.
Market capitalisation tells you what the shares are worth. But buy every share and you also take on the company's debt — and its cash. Enterprise value puts those together to show the price of the whole business, which is why it sits behind many valuation multiples.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 4 min
- Also called
- Firm value, Takeover value
- Updated
Enterprise value in plain words
Enterprise value measures what the whole company is worth to all its investors — lenders as well as shareholders.1
The simple formula is market capitalisation plus the market value of debt minus cash and equivalents.1
Think of it as roughly what it would cost to buy the entire business, before any takeover premium.1 See Market Capitalisation.
How to calculate enterprise value, step by step
Find market capitalisation
Multiply the share price by the number of shares outstanding.
Add debt
Add the company's debt to the equity value.1
Subtract cash
Subtract cash, because a buyer could use the target's cash to pay down part of the debt.1
Consider other claims
The extended formula also adds preferred shares and noncontrolling interest.
Check the result
Academic valuation uses the same build: market value of equity plus market value of debt minus cash.2
Use it in multiples
Divide by EBITDA to get the EV/EBITDA multiple.2
Worked examples
Example 1 — Basic calculation
EV $650mA company has a market cap of $500m, debt of $200m and cash of $50m.
| Market cap | $500m |
| Plus debt | +$200m |
| Minus cash | −$50m |
| Enterprise value | $650m |
EV equals market capitalisation plus market value of debt minus cash and equivalents.1
Example 2 — Same market cap, different debt
B costs $400m moreCompany A: market cap $600m, no debt, $100m cash. Company B: market cap $600m, $300m debt, no cash.
| A's EV | $600m − $100m = $500m |
| B's EV | $600m + $300m = $900m |
Debt is adjusted for cash because the acquirer can use the target's cash to pay part of the assumed debt.1
Example 3 — EV/EBITDA
10xThe company from Example 1 earns $65m EBITDA.
| EV | $650m |
| EBITDA | $65m |
| EV/EBITDA | $650m ÷ $65m = 10x |
The EV/EBITDA multiple nets cash against debt to get enterprise value, then divides by EBITDA.2
Enterprise value vs market capitalisation
| Aspect | Market cap | Enterprise value |
|---|---|---|
| What it measures | Value of the shares | Value of the whole business |
| Includes debt | No | Yes |
| Subtracts cash | No | Yes |
| Paired with | Net income, P/E | EBITDA, sales |
Where enterprise value is used
Comparing companies
Puts firms with different debt levels on the same footing.
Valuation multiples
EV/EBITDA and EV/sales use it as the numerator.
Takeovers
Estimates the cost of buying a business before a premium.
Credit analysis
Shows how much of the business value is funded by debt — see Default Risk.
Advantages and disadvantages
Advantages
- Captures debt as well as equity.
- Makes companies with different capital structures comparable.
- Pairs well with operating measures such as EBITDA.
Disadvantages
- Needs balance-sheet data that can be out of date.
- Debt is often taken at book value, not market value.
- Not all cash is truly spare.
- Definitions vary on preferred shares, leases and minority interests.
Going deeper
Read as far as you need. Each level builds on the one before it.
Common mistakes
Mixing EV with net income
Pairing a whole-firm value with an equity-only profit.
Forgetting cash
Overstating EV by not subtracting cash.
Ignoring other claims
Leaving out preferred shares or minority interests.
Assuming all cash is spare
Companies need some cash to run day to day.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- EV = market cap + debt − cash.
- It estimates the cost of buying the whole business.
- It allows comparisons across different debt levels.
- Pair it with whole-firm measures such as EBITDA.
- Definitions vary for preferred shares, leases and minorities.
Frequently asked questions
Can enterprise value be negative?
Is a higher EV better?
Why use EV instead of market cap?
Further learning
- Market Capitalisation
The equity part of EV.
- Price-to-Earnings Ratio
The equity-based multiple to compare.
- Default Risk
Why debt in EV matters to lenders.
- Fundamental Analysis
How EV fits valuation work.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Corporate Finance Institute. What is Enterprise Value (EV)? (opens in a new tab) Checked .
- NYU Stern (Aswath Damodaran). Valuation: Packet 2 — Relative Valuation (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.