What Is EV (Enterprise Value): Definition, Example & Calculation
EV is an acronym for Enterprise Value. This is a financial modelling and valuation tool for measuring your business’s total value. However, your EV isn’t just for your business’s equity value; it’s for the value of the entire market. This means that all of the asset claims and ownership interests (equity and debt) are included.
If you’re having trouble understanding EV, don’t despair. Here, you will learn valuation techniques to calculate your company’s EV. And in doing so, you can determine where your business stands financially.
Here’s What We’ll Cover:
Calculating Your EV
Calculating Enterprise Value is easier than you might think. In fact, the formula used to determine EV is quite simple. To find your EV, perform the following calculation:
Enterprise Value = Market Capitalization + Market Value of Debt - Cash and Equivalents
You can figure out your company’s value by assessing the assets you own. Admittedly, however, determining your assets’ market values can be challenging. An easier way would be to look at how you paid for your assets.
Moreover, you are basing your company’s value on its current market value. This means the market value of both equity and liabilities.
Components of Enterprise Value
There are a few vital components that make up EV. Let’s take a close look at the definition of each one. This will make it easier to understand how Enterprise Value functions.
You can find your company’s equity value by multiplying your fully-diluted outstanding shares by each stock’s market cost. Please note that diluted outstanding shares differ from standard shares. Outstanding shares that are fully diluted include the following:
- Convertible securities
- In-money options
If you’re planning to acquire another business, you’ll have to pay its shareholders. But to do this, you must pay a minimum of the market capitalisation value. Still, this isn’t enough to draw the accurate value of your company. Additional components are needed.
Remember, you must also include any debts you owe out. Your total debt includes contributions from banks and applicable creditors. And since such liabilities bear interest, they can be both short-term and long-term debt.
When you subtract cash from your debt, your liabilities get adjusted. This works on the principle that you can use the cash from the company you are buying to pay the assumed debt. Moreover, you may use the debt’s book value if you don’t know the debt’s market value.
Minority (non-controlling) interest is part of a subsidiary that isn’t owned by a parent company. This is typically when owning more than 50% (but less than 100%). The subsidiary’s financial statements become consolidated. They are then reflected in the parent company’s financial results.
Furthermore, the parent company must include all of the subsidiary’s revenue, cash flow, and expenses in its figures. This is known as a minority interest. By including it, your Enterprise Value reflects the subsidiary’s total value, as well.
This refers to hybrid securities that consist of both debt and equity. However, preferred stock is generally treated like debt. When you buy a business, you will have to repay preferred stocks just like you would debt.
Cash and Cash Equivalents
In your business’s statement, cash and cash equivalents are majority liquid assets. Some good examples of cash equivalents include:
- Short-term investments
- Money market funds
- Marketable security
- Commercial paper
Cash equivalents need to be subtracted from your Enterprise Value. In doing so, it makes the purchase price cheaper to buy your target company. The assumption is that you will use cash to immediately pay off some of the costs of buying the company.
EV plays an important role in acquisitions and mergers. This is especially true when there is interest in controlling ownership. Plus, you can use Enterprise Value to compare the various capital structures between businesses.
If there are changes in capital structure, the EV’s total amount will be affected. If you need help getting such figures, FreshBooks features useful tools designed for your accounting needs. You can ensure accuracy, produce financial reports, prove compliance, and more.
FreshBooks makes it easy to work closely with your accountant. And if you require additional assistance, don’t forget to check out our Resource Hub. We offer many essential insights into running a small business in the UK and more.