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Understanding Enterprise Value
Posted by Blain Reinkensmeyer
September 6, 2007 at 6:00 pm
Enterprise value (EV) is a widely overlooked factor when conducting fundamental analysis. Most people simply look at the market capitalization, but this alternative can offer an added interpretation for company value.
To calculate the enterprise value, take the market capitalization and add debt, minority interest and preferred shares, then minus total cash and cash equivalents.
To find the enterprise value of a company head over to yahoo finance, type in the company’s stock ticker symbol, then pull up the “key statistics”. Enterprise value will be listed 2nd on the list; here is a visual example using MSFT:
The whole purpose of the enterprise value is to get a deeper interpretation for what a company’s value actually is. The Market cap just tells you what you would have to pay to buy a company straight up based on the stock price, whereas enterprise value tells you how much it would cost incorporating debt, preferred shares, cash, and cash equivalents into the picture. Many investors actually consider EV as a better form of interpreting company value over market cap.
That’s great to know but once you have that information, what do you do with it? Do you compare it to the competition?
Most investors don’t even take enterprise value into consideration, the post is there to simply expose you to it and let you work with it as you please. You could compare it to other companies within the industry or sector as perhaps a valuation tool yes.