Glossary·Written by a CPA
Enterprise value
Also called: EV
The value of a whole business including its debt, roughly market cap plus debt minus cash.
Enterprise value is basically just an estimate of what it would cost to buy the entire company, debt and all. You start with market cap, add the debt, and subtract the cash, because if you bought the company you'd take on its debt but also get its cash.
It's like buying a house. The price tag isn't the full story if there's a mortgage you have to take over, or a pile of cash left in the safe.
For you, enterprise value is useful when you're comparing companies with very different amounts of debt. Two companies with the same market cap can have very different enterprise values, and that's often where the real difference in risk shows up.
Example. As an example, say a company's market cap is $10 billion, it has $3 billion of debt and $1 billion of cash. Enterprise value is $10 billion plus $3 billion minus $1 billion, which is $12 billion.
The catch. The simple formula leaves out things like leases, preferred stock and minority interests, so different data sites can show different enterprise values for the same company.
Where I talk about it
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- MELI Stock- Is MercadoLibre Stock a Better Buy than Amazon Stock? at 0:30
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This is education, not tax or investment advice. I'm a CPA, but I'm not your CPA. Full disclaimer.