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Enterprise value (EV), Total enterprise value (TEV), or Firm value (FV) is an economic measure reflecting the market value of a whole business. It is a sum of claims of all claimants: creditors (secured and unsecured) and equityholders (preferred and common). Enterprise value is one of the fundamental metrics used in business valuation, financial modeling, accounting, portfolio analysis, risk analysis, etc.
EV is more comprehensive than market capitalization (market cap), which only includes common equity.[1]
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:
In practice, EV calculations rely on reasonable estimates of the market value of these components. For example, in many professional valuations:
When using valuation multiples such as EV/EBITDA and EV/EBIT, the numerator should correspond to the denominator. The EV should, therefore, correspond to the market value of the assets that were used to generate the profits in question, excluding assets acquired (and including assets disposed) during a different financial reporting period. This requires restating EV for any mergers and acquisitions (whether paid in cash or equity), significant capital investments or significant changes in working capital occurring after or during the reporting period being examined. Ideally, multiples should be calculated using the market value of the weighted average capital employed of the company during the comparable financial period.
When calculating multiples over different time periods (e.g. historic multiples vs forward multiples), EV should be adjusted to reflect the weighted average invested capital of the company in each period.[note 1]
Enterprise value, P/E ratio, Ebitda, Fair market value, Capital structure
Enterprise value, Takeover, Minority discount, Synergies, Market capitalization
Technical analysis, Fundamental analysis, John Maynard Keynes, Capital asset pricing model, Earnings growth
Discounted cash flow, New York University, Corporate finance, Opportunity cost, Cost of capital
Mergers and acquisitions, Accounting, Accounting research, Intangible asset, International Financial Reporting Standards