Enterprise Value

The Enterprise Value is a way of measuring a company’s value. It is a much more realistic way then measuring a company’s Market Cap.

The formula looks like this

Market Cap + Cash and equivalents – Debt

This formula gives you a company’s theoretical takeover price. In other words it tells you how much a company should be worth if it is bought out. Unlike The Market Cap the Enterprise Value takes into consideration both the Debt and Cash a company has.

For example there are two companies. Company A and Company B. Each has a market cap of $1 billion. Company A however has $600 million in debt and no cash. Company B only has $100 million in Debt and $50million in cash.

If we were to plug both companies into the equation we would get this.

Company A = $1 Billion – 600 Million or $400 million

Company B $1 Billion + 50 Million - $100 million or 950 million

This gives us a more accurate estimate of what each company is worth. If were where only going to use the market cap to determine the value of each company we would assume that both companies A and B are worth about the same.

However, if we look at all things considered Company B is actually worth over twice as much as Company A. This helps us to look through the market cap and get a better idea of a company’s net worth.

Other Financial Indicators

Using different financial indicators we can get a good idea of what a company’s fundamentals look like and we can use that to decide if we want to invest into it or not.

Internal Rate of Return – Rates a company’s projects

EBITDA - This looks at earnings before some of a company’s major expenses

Cash Flow Ratio - This looks at a company’s ability to pay its obligations