BQLearning: What Is Enterprise Value?
Simply put, enterprise value is the takeover price of an entity.
BQLearning is a show that seeks to demystify financial markets, economic theories, legal processes and political structures. This series focuses on financial market jargon.
Enterprise value is a measure of a company’s total value and is a more comprehensive tool to analyse the value of a company compared with the market capitalisation of equity shares.
Simply put, it is the takeover price of an entity. If a company is to be bought out, this is the price to be paid. Enterprise value is a better metric for assessing mergers and acquisitions that the market capitalisation which leaves out debt and cash.
The enterprise value is calculated by adding market capitalisation of equity shares (common and preference) to the market value of debt and minority interest (investment in another company). From this, the total cash and cash equivalents are taken out to arrive at the enterprise value.
Anupam Gupta, independent consultant at Aavan Research explains the importance of enterprise value, and why it is useful when referring to capital intensive sectors like manufacturing, and cyclical companies.