Enterprise Value

Enterprise Value is the measure of a company's total value. Enterprise Value can be thought of as the effective cost of buying a company or the theoretical price of a target company. The simple formula for enterprise value is:

  • EV = Market Capitalization + Market Value of Debt – Cash and Equivalents

Source: YouTube

Gartner Enterprise Value Equation

In today’s complex environment, enterprise value is becoming as much about what and how you deliver value to stakeholders as it is about the value you capture in return.

In short:

  • Today’s business environment is full of conflicting variables, discontinuity and disruption. Critical nonfinancial factors increasingly play a role in value creation, but traditional return-on-investment models can’t properly account for their contribution.
  • What’s needed is a more powerful multifactor and multi-stakeholder approach — a new enterprise value equation — in which organizations balance decision making within a broader construct of how to exchange value with all stakeholders.
  • A new continuous value creation process enables enterprises to listen, assess, act, measure, adjust and evolve their decisions to create sustainable long-term value and impact

Gartner: Is Your Enterprise Value Model Undermining Your Ambitions?

Snippet from Wikipedia: Enterprise value

Enterprise value (EV), total enterprise value (TEV), or firm value (FV) is an economic measure reflecting the market value of a business (i.e. as distinct from market price). It is a sum of claims by all claimants: creditors (secured and unsecured) and shareholders (preferred and common). Enterprise value is one of the fundamental metrics used in business valuation, financial analysis, accounting, portfolio analysis, and risk analysis.

Enterprise value is more comprehensive than market capitalization, which only reflects common equity. Importantly, EV reflects the opportunistic nature of business and may change substantially over time because of both external and internal conditions. Therefore, financial analysts often use a comfortable range of EV in their calculations.