Enterprise Value Formula

Enterprise Value Formula is an economic measure that reflects the entire value of the Business including the secured and unsecured creditors and the equity and preference shareholders of the company and is more often used in acquiring other businesses or merging two or more companies to generate synergy.

What is Enterprise Value Formula?

The enterprise value of a companyEnterprise Value Of A CompanyEnterprise Value is a measure of a company's total value that spans the entire market rather than just the equity value. It includes all debt and equity-based ownership claims. This value, which is calculated as the market value of debt + market value of equity - cash and cash equivalents, is particularly relevant when valuing a takeover.read more can be ideally defined as an amount that represents the entire cost of the company in case some investor intends to acquire 100% of it. The formula for enterprise value is calculated by adding the company’s market capitalization, preferred stock, outstanding debt, and minority interestMinority InterestMinority interest is the investors' stakeholding that is less than 50% of the existing shares or the voting rights in the company. The minority shareholders do not have control over the company through their voting rights, thereby having a meagre role in the corporate decision-making.read more together, and then deducting the cash and cash equivalentsCash And Cash EquivalentsCash and Cash Equivalents are assets that are short-term and highly liquid investments that can be readily converted into cash and have a low risk of price fluctuation.  Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They are normally found as a line item on the top of the balance sheet asset. read more obtained from the balance sheet. The cash and cash equivalents are deducted from the enterprise value since the post-acquisition of the complete ownership of the company; the cash balance basically belongs to the new owner. Mathematically, it is represented as,

Enterprise value Formula = Market Capitalization + Preferred stock + Outstanding Debt + Minority Interest – Cash & Cash Equivalents

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For eg:
Source: Enterprise Value Formula (wallstreetmojo.com)

Step by Step Application of Enterprise Value Formula

The Calculation of Enterprise Value equation can be done in the following six simple steps:

  1. Firstly, the current price per share of the company has to be found out from the stock market, and then the number of paid-up equity shares has to be collected from the balance sheet. Now, the current market capitalization of the stock can be derived by multiplying the current price per share with the outstanding number of paid-up equity shares.


    market capitalization formula(ev)

  2. Now, the current value of the preferred stock is computed by multiplying the par value of the stock with the number of outstanding preference shares, which are both available in the balance sheet.


    prefered stock formula(ev)

  3. Now, the current outstanding debt balance is calculated by adding financial liabilitiesFinancial LiabilitiesFinancial Liabilities for business are like credit cards for an individual. In simple terms, a financial liability is a contractual obligation that needs to be settled in cash or any other financial asset and are very useful in the sense that the company can employ “others’ money” in order to finance its own business-related activities for some time period which lasts only when the liability becomes due. The liabilities could be of two types, short term and long term.read more like bank loans and corporate bonds, which are again available in the balance sheet.


    outstanding Debt formula(ev)

  4. Now, the minority interest is captured, as reported in the balance sheet.

  5. Now, the cash and cash equivalents are computed by adding the cash balance and fixed deposits and current account deposits with banks, which are again mentioned in the balance sheet under the current asset sectionCurrent Asset SectionCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more.


    cash&cash equivalents formula(ev)

  6. Finally, the enterprise value is arrived at by adding the values derived in Step1-4 and deducting the value in Step 5 as shown below,


    enterprise value formula 1

Examples of Enterprise Value Formula

Let’s take a few simples to advanced examples to understand Enterprise Value.

You can download this Enterprise Value Formula Excel Template here – Enterprise Value Formula Excel Template

Example #1

Let us assume that a company ABC Limited has the following financial information:

Therefore, given

  • Market capitalization = 2,000,000 * $3 = $6,000,000
  • Preferred stock = $0
  • Outstanding debt = $3,000,000
  • Minority interest = $0
  • Cash and cash equivalents = $1,000,000

Based on the above formula, the calculation of the enterprise value of ABC Limited can be as follows:

  • EV Formula = Market capitalization + Preferred stock + Outstanding debt + Minority interest – Cash and cash equivalents
  • Enterprise value = $6,000,000 + $0 + $3,000,000 + $0 – $1,000,000
  • Enterprise value = $8,000,000 or $8 million

Example #2

Let us take the real-life example of Apple Inc.’s annual reportAnnual ReportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more as on September 29, 2018. The following information is available:

Given

  • Market capitalization (millions) = 4,754.99 * $225.74 = $1,073,391
  • Preferred stock = $0
  • Outstanding debt (millions) = $11,964 + $102,519 = $114,483
  • Minority interest = $0
  • Cash and cash equivalents (millions) = $25,913

Based on the above formula, the calculation of the enterprise value of Apple Inc. can be as follows:

  • EV Formula = Market capitalization + Preferred stock + Outstanding debt + Minority interest – Cash and cash equivalents
  • Enterprise value Apple Inc. (millions) = $1,073,391 + $0 + $114,483 + $0 – $25,913
  • Enterprise value Apple Inc. (millions) = $1,161,961
  • Therefore, Apple Inc.’s enterprise value as on September 29, 2018, stood at around $1,161.96 billion or 1.16 trillion.

Enterprise Value Calculator

You can use the following Enterprise Value Calculator.

Market Capitalization
Preferred Stock
Outstanding Debt
Minority Interest
Cash and Cash Equivalents
Enterprise Value Formula =
 

Enterprise Value Formula = Market Capitalization + Preferred Stock + Outstanding Debt + Minority Interest - Cash and Cash Equivalents
0 + 0 + 0 + 0 - 0 = 0

Relevance and Use

The importance of enterprise value revolves around the fact that it helps in the assessment of the worth of a company. Further, the enterprise value can also be seen as the theoretical takeover price of a company, which is to be acquired, since it accounts for the impact of the outstanding debt as well as the cash balance that is also taken over by the acquirer during the transaction. However, the acquisition of the outstanding debt increases the cost of acquisition, the acquisition of the available cash balance moderates the cost of acquisition to some extent.

Given that the debt portion is included in enterprise value, it enables comparison of companies with different capital structures, which eventually helps in the decision of acquisition. Enterprise value can be used by the acquirer to compare returns from different businesses in which he/she intends to buy controlling stakes.

Calculate Enterprise Value in Excel

Let us take the case of Apple Inc. mentioned in EV Formula Example #2 to demonstrate in excel template the working towards the calculation of the Enterprise Value:

In the below template is the data of Apple Inc for September 2018 to calculate its Enterprise Value.

enterprise Value Excel Example1

In the below given excel template, we have used the calculation of Enterprise Value to find Apple Inc.’s Enterprise Value.

Enterprise Value Excel Example1.1

So the Calculation of Enterprise Value will be:-

Enterprise Value Excel Example1.2

Recommended Articles:

This article has been a guide to Enterprise Value Formula. Here we discuss its uses along with simple to advanced practical examples to understand Enterprise Value. Here we also provide you with Enterprise Value Formula Calculator with a downloadable excel template. You can learn more about Excel Modeling from the following articles –

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Comments

  1. Nigussie says

    Your example to clarify the meaning of EV is good.I am very happy about your lesson.thank you

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