Enterprise Value (EV)
Definition
Enterprise value is the total value of a company, including its equity and debt, minus its cash. It represents what it would cost to buy the entire company outright.
Market Capitalization + Total Debt − Cash & Cash Equivalents = Enterprise ValueHow to Interpret Enterprise Value (EV)
EV is a more complete measure of company value than market cap because it accounts for debt. A company with $1 billion market cap and $500 million in debt has an EV of $1.5 billion — it would cost that much to acquire. EV is used as the denominator in FCF/EV yield, our preferred valuation metric. We prefer EV to market cap because it normalizes for different capital structures.
Why It Matters for Investors
Enterprise value allows you to compare companies regardless of how they are financed. Two companies with the same market cap but different debt levels have very different values. EV captures the full picture. Every valuation analysis should start with EV, not market cap.
Frequently Asked Questions
Why add debt but subtract cash?
If you buy a company, you assume its debt (you pay it off) but you also get its cash. EV reflects the true economic cost of acquisition.
What is the difference between EV and market cap?
Market cap only values the equity. EV values the entire business. For companies with significant debt, EV can be much higher than market cap.
When should I use EV instead of market cap?
Always use EV when calculating valuation multiples like FCF yield or EV/EBITDA. Market cap is only appropriate for comparing equity returns or when the company has no debt.
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