Enterprise value

Enterprise value (EV), total enterprise value (TEV), or firm value (FV) is an economic measure reflecting the market value of a business. 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 modeling, accounting, portfolio analysis, and risk analysis.

Enterprise value is more comprehensive than market capitalization, which only reflects common equity.

A simplified way to understand the EV concept is to envision purchasing an entire business. If you settle with all the security holders, you pay EV. Counter-intuitively, increases or decreases in enterprise value do not necessarily correspond to "value creation" or value destruction". Any acquisition of assets (whether paid for in cash or through share issues) will increase EV, whether or not those assets are productive. Similarly, reductions in capital intensity (for example by reducing working capital) will reduce EV.

EV can be negative if the company, for example, holds abnormally high amounts of cash that is not reflected in the market value of the stock and total capitalization.

All the components relevant in liquidation analysis, since using absolute priority in a bankruptcy all securities senior to the equity have par claims. Generally, also, debt is less liquid than equity so that the "market price" may be significantly different from the price at which an entire debt issue could be purchased. In valuing equities, this approach is more conservative.

Cash is subtracted because it reduces the net cost to a potential purchaser. The effect applies whether the cash is used to issue dividends or to pay down debt.

Value of minority interest is added because it reflects the claim on assets consolidated into the firm in question.

Value of associate companies is subtracted because it reflects the claim on assets consolidated into other firms.

EV should also include such special components as unfunded pension liabilities, , environmental provisions, abandonment provisions, and so on, since they also reflect claims on the company.

Unlike market capitalization, where both the market price and the outstanding number of shares in issue are readily available and easy to find, it is virtually impossible to calculate an EV without making a number of adjustments to published data, including often subjective estimations of value:

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