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Formula for Enterprise Value
The formula used to calculate enterprise value is:
EV = market capitalization (MC) plus Total Debt minus Cash
Where:
MC is determined by multiplying the share price by the outstanding shares, which are shares that have already been sold.
Purpose of the EV Metric
As a result, EV is a metric that effectively paints a picture of a company’s worth as it not only includes the company’s market cap, which other competing metrics tend to focus on solely, but also what debts and unassigned cash the company might have.
Example of EV
Take for instance, Company X, which has a market cap of $100 million, $50 million in cash but is carrying $40 million in debt. Run these numbers through the formula, and the Company X’s EV is equal to $90 million.
Concluding from Enterprise Value
Lastly, something to keep in mind when using EV is that the formula assumes that debt is bad.
But debt isn’t always bad. Some companies, who in an effort to grow will incur loads of debt as a result of expansion intended purchases that then negatively affects their EV score.
Which may lead one to move away from a company that actually, could have been a very worthwhile investment.
What is EV (Enterprise Value)? FAQs
