What is Enterprise Value Formula?

The enterprise value of a companyEnterprise Value Of A CompanyEnterprise value (EV) is the corporate valuation of a company, determined by using market capitalization and total debt.read more can be ideally defined as an amount that represents the entire cost of the company in case some investor intends to acquire 100% of it. The formula for enterprise value is calculated by adding the company market capitalization Market CapitalizationMarket capitalization is the market value of a company’s outstanding shares. It is computed as the product of the total number of outstanding shares and the price of each share.read more, preferred stockPreferred StockA preferred share is a share that enjoys priority in receiving dividends compared to common stock. The dividend rate can be fixed or floating depending upon the terms of the issue. Also, preferred stockholders generally do not enjoy voting rights. However, their claims are discharged before the shares of common stockholders at the time of liquidation.read more, outstanding debt, and minority interestMinority InterestMinority interest is the investors’ stakeholding that is less than 50% of the existing shares or the voting rights in the company. The minority shareholders do not have control over the company through their voting rights, thereby having a meagre role in the corporate decision-making.read more together, and then deducting the cash and cash equivalentsCash And Cash EquivalentsCash and Cash Equivalents are assets that are short-term and highly liquid investments that can be readily converted into cash and have a low risk of price fluctuation.  Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They are normally found as a line item on the top of the balance sheet asset. read more obtained from the balance sheet. The cash and cash equivalents are deducted from the enterprise value since the post-acquisition of the complete ownership of the company; the cash balance belongs to the new owner. Mathematically, it is represented as,

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Step by Step Application of Enterprise Value Formula

Examples of Enterprise Value Formula

Let’s take a few simple to advanced examples to understand Enterprise Value.

  • Firstly, the current price per share of the company has to be found out from the stock market, and then the number of paid-up equity shares has to be collected from the balance sheet. Now, the current market capitalization of the stock can be derived by multiplying the current price per share with the great number of paid-up equity shares. Market Capitalization = Current Price Per Share x Outstanding Number of Paid-up Equity Shares Now, the current value of the preferred stock is computed by multiplying the stock’s per value by the number of outstanding preference shares, which are both available on the balance sheet. Preferred Stock = Par Value x Outstanding Number of Preference Shares The current outstanding debt balance is calculated by adding financial liabilities like bank loans and corporate bonds, again available on the balance sheet. Outstanding Debt = Bank Loans + Corporate Bonds Now, the minority interest is captured, as reported in the balance sheet. The cash and cash equivalents are computed by adding the cash balance and fixed deposits and current account deposits with banks, which are again mentioned in the balance sheet under the current asset section. Cash and Cash Equivalents = Cash Balance + Fixed Deposits and Current Account Deposits with Banks Finally, the enterprise value is arrived at by adding the values derived in Step1-4 and deducting the value in Step 5 as shown below, Enterprise Value = Market Capitalization + Preferred Stock + Outstanding Debt + Minority Interest – Cash and Cash Equivalents

Market Capitalization = Current Price Per Share x Outstanding Number of Paid-up Equity Shares

Preferred Stock = Par Value x Outstanding Number of Preference Shares

Outstanding Debt = Bank Loans + Corporate Bonds

Cash and Cash Equivalents = Cash Balance + Fixed Deposits and Current Account Deposits with Banks

Enterprise Value = Market Capitalization + Preferred Stock + Outstanding Debt + Minority Interest – Cash and Cash Equivalents

Example #1

Let us assume that a company ABC Limited has the following financial information:

  • Shares Outstanding:Shares Outstanding:Outstanding shares are the stocks available with the company’s shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner’s equity in the liability side of the company’s balance sheet.read more 2,000,000Current Share Price: $3Total Debt: $3,000,000Total Cash: $1,000,000

Therefore, given

  • Market capitalization = 2,000,000 * $3 = $6,000,000Preferred stock = $0Outstanding debt = $3,000,000Minority interest = $0Cash and cash equivalents = $1,000,000

Based on the above formula, the calculation of the enterprise value of ABC Limited can be as follows:

  • EV Formula = Market capitalization + Preferred stock + Outstanding debt + Minority interest – Cash and cash equivalentsEnterprise value = $6,000,000 + $0 + $3,000,000 + $0 – $1,000,000Enterprise value = $8,000,000 or $8 million

Example #2

Let us take the real-life example of Apple Inc.’s annual reportAnnual ReportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company’s performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more as on September 29, 2018. The following information is available:

Given

  • Market capitalization (millions) = 4,754.99 * $225.74 = $1,073,391Preferred stock = $0Outstanding debt (millions) = $11,964 + $102,519 = $114,483Minority interest = $0Cash and cash equivalents (millions) = $25,913

Based on the above formula, the calculation of the enterprise value of Apple Inc. can be as follows:

  • EV Formula = Market capitalization + Preferred stock + Outstanding debt + Minority interest – Cash and cash equivalentsEnterprise value Apple Inc. (millions) = $1,073,391 + $0 + $114,483 + $0 – $25,913Enterprise value Apple Inc. (millions) = $1,161,961Therefore, Apple Inc.’s enterprise value as on September 29, 2018, stood at around $1,161.96 billion or 1.16 trillion.

Enterprise Value Calculator

You can use the following Enterprise Value Calculator.

Relevance and Use

The importance of enterprise value revolves around the fact that it helps assess the worth of a company. Further, the enterprise value can also be seen as the theoretical takeover price of a company to be acquired. It accounts for the impact of the outstanding debt and the cash balance that the acquirer also takes over during the transaction. However, the acquisition of the outstanding debt increases the cost of acquisition, the acquisition of the available cash balance moderates the acquisition cost to some extent.

Given that the debt portion is included in enterprise value, it enables the comparison of companies with different capital structures, which eventually helps in acquisition. In addition, the acquirer can use enterprise value to compare returns from different businesses in which they intend to buy controlling stakes.

Calculate Enterprise Value in Excel

Let us take the case of Apple Inc. mentioned in EV Formula Example #2 to demonstrate in an excel template the working towards the calculation of the Enterprise Value:

In the below template is the data of Apple Inc for September 2018 to calculate its Enterprise Value.

In the below given excel template, we have used the calculation of Enterprise Value to find Apple Inc.’s Enterprise Value.

So the Calculation of Enterprise Value will be:-

This article is a guide to Enterprise Value Formula. Here we discuss its uses and simple to advanced practical examples to understand Enterprise Value. We also provide you with Enterprise Value Formula Calculator with a downloadable excel template. You can learn more about Excel Modeling from the following articles –

  • Value Formula in ExcelValue Formula In ExcelIn Excel, the value function returns the value of a text representing a number. So, if we have a text with the value $5, we can use the value formula to get 5 as a result, so this function gives us the numerical value represented by a text.read moreFormula of Current AccountFormula Of Current AccountThe current account formula of the balance of payment measures the import and export of goods and services and is calculated as the sum of the trade balance, net income, and current transfers. Current account formula = (X-M) + NI + NTread moreMarket Cap vs. Enterprise ValueMarket Cap Vs. Enterprise ValueMarket cap is the market value of a company’s stock. This financial metric assesses the value of a business based solely on the stock. Enterprise Value on the other side is a more comprehensive and alternative approach to measuring a company’s total value. read moreWhat is Enterprise Value?What Is Enterprise Value?Enterprise value (EV) is the corporate valuation of a company, determined by using market capitalization and total debt.read more