Enterprise Value

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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.

Company B would be worth more than company A despite them having the same Market Cap.