| Type | Valuation Metric |
| Formula | Market Cap + Total Debt - Cash & Equivalents |
| Primary Use | M&A valuations and calculating EV/EBITDA |
formulaEV = Market Capitalization + Total Debt - Cash and Cash EquivalentsMarket Cap only measures the equity tag. By adding Debt (because an acquirer must take on or pay off that debt) and subtracting Cash (because an acquirer gets to pocket that cash to reduce their effective purchase price), EV represents the true Takeover Value.
| Company | Market Cap | Total Debt | Cash | Enterprise Value |
|---|---|---|---|---|
| Company A | $10 Billion | $2 Billion | $1 Billion | $11 Billion |
| Company B | $10 Billion | $0 | $5 Billion | $5 Billion |
Company A and Company B have the exact same stock market valuation (Market Cap). But Company B has massive cash reserves and no debt. Buying Company B is fundamentally twice as cheap as buying Company A, a reality reflected natively in the EV metric.
Enterprise Value is rarely used in isolation. It forms the numerator for critical valuation multiples, most notably EV/EBITDA and EV/Free Cash Flow. These multiples are superior to the P/E ratio because they are neutral to the capital structure (how much debt the company uses).
The standard denominator for EV in buyout and M&A evaluations (the EV/EBITDA multiple).
Used to calculate the Free Cash Flow to the Firm (FCFF) relative to the Enterprise Value.