Calculating enterprise value (EV) for a stock is an important step in understanding its worth. The enterprise value formula takes into account the market capitalization, debt, and cash of a company to give investors a more accurate picture of its overall value. In this guide, we will walk you through the steps of calculating enterprise value and explain what it means for a stock. Let's get started!
What is enterprise value (EV)?
Enterprise value is a measure of a company's overall value, including both its equity and debt. It is used to give investors a more complete picture of a company's worth than simply looking at its market capitalization (market cap). The reason why this metric is so valuable is that it takes into account a company's debt and cash, which can give a more accurate picture of its overall value.
This stems from the fact that if you buy a company, you also get the cash in the company's balance sheet and the company's debt. So, naturally, the cash acts as a discount on the price you are paying for the stock and the debt as an obligation to pay.
What does enterprise value tell you about a stock?
The enterprise value of a stock tells you the accurate price you are paying for the stock. The market capitalization or price per share only takes into account the market value of the company. The reality is, however, that if an acquisition of the stock or company were to be made, you would be entitled to the company's assets and liabilities. Therefore, these two factors must be considered when analyzing a stock's real value.
The components of enterprise value
The enterprise value formula takes into account three components:
- Market capitalization
These are the key factors that make up a company's overall value. So let's take a closer look at each one.
This is the most well-known component of enterprise value and is simply the market value of the company's equity. It is calculated by multiplying the current stock price by the number of outstanding shares.
This component takes into account a company's debt obligations. It includes both short-term and long-term debt, such as bonds and loans.
The cash component is the final piece of enterprise value. It is the cash on the company's balance sheet, which is used to discount the stock price.
Now that we know the components of enterprise value let's put them all together in the enterprise value formula.
Enterprise value formula
The enterprise value formula is:
EV = Market cap + Debt – Cash
To calculate enterprise value, simply add the market capitalization, debt, and cash of a company together. The result will give you the enterprise value of the stock.
Remember that these values are constantly changing, and you must use the right ones. For example, the market capitalization might change minute by minute during open market hours, so it is important to use the most up-to-date number. At the same time, the debt and cash may change quarterly, so using the numbers from the most recent quarterly financial report on the company's balance sheet is recommended.
Below you will find an example calculation of the enterprise value and a way to automate this calculation.
Example calculation of EV
When this article was written, Apple Inc. (AAPL) had a market cap of $1.2 trillion, long-term debt of $106 billion, and cash on the balance sheet of $193 billion.
image wisesheets balance sheet
To calculate enterprise value, we simply add these three numbers together:
EV = $1.2 trillion + $106 billion – $193 billion = $1.113 trillion
As you can see, enterprise value gives us a more complete picture of a company's overall value. This is because the market cap only tells us the equity value, but enterprise value also considers the debt and cash, which gives us a more accurate number.
Automate EV calculation
One of the best ways to find value stocks to invest in is to compare the enterprise value of companies in a similar industry or sector. Unfortunately, calculating the enterprise value manually for many companies is time intensive and tedious.
For this reason, you can use a tool like Wisesheets, which automatically calculates this number for you with the most updated company information.
Using the WISE function like this:
=WISE("ticker", "enterprise value", "ttm")
You can get the enterprise value for stock across 50+ major global stock exchanges. Better yet, Wisesheets covers many more important metrics and financials such as ROE, PE ratio, debt to equity, and more.
How to use EV in investment analysis
Once you have the enterprise value for a company or group of companies, you can start to do some interesting analysis.
Enterprise value to market cap analysis
For example, let's say you want to find the most undervalued companies in the tech sector. First, you would get the enterprise value for all tech companies and then compare them to their respective market caps.
Companies with a lower enterprise value relative to their market cap would be considered undervalued.
You can also use enterprise value to find the overall value of a company. This is useful when doing a sum-of-the-parts analysis, where you are trying to determine a company's intrinsic value by valuing its parts separately.
To do this, you simply need to subtract the enterprise value of each company from its market cap. This will give you the equity value of the company.
For example, if a company has a market cap of $1 billion and an enterprise value of $800 million, the equity value would be $200 million.
This technique can be helpful when trying to value companies with large debt loads or companies that have a lot of cash on their balance sheets.
EV multiple analysis
Another useful way to use enterprise value is in EV/EBITDA analysis. This is a popular valuation metric that is used by many investors and analysts.
To calculate EV/EBITDA, you simply take a company's enterprise value and divide it by its EBITDA.
This ratio is helpful because it takes into account a company's debt and cash, which can help you get a more accurate picture of the company's value.
EV/EBITDA is also a popular metric because it is easy to calculate and compare across companies.
For example, let's say you want to find the most undervalued tech companies. You could get the EV/EBITDA ratio for all tech companies and then compare them to the industry average.
Companies with a lower EV/EBITDA ratio would be considered undervalued.
Limitations of EV
While enterprise value is a valuable metric, it is not without its limitations.
One of the biggest problems with enterprise value is that it does not consider off-balance sheet items. These are items such as leases or operating agreements that are not included on the balance sheet but still impact the company's overall value.
Another limitation is that enterprise value does not take into account future growth. This is why enterprise value is often used in conjunction with other valuation metrics, such as the price-to-earnings ratio or the enterprise multiple.
Finally, enterprise value is a historical metric. This means that it only tells us what the company is worth today and does not take into account future events that could impact the company's value.
Despite these limitations, enterprise value is still a valuable metric for valuation and investment analysis.
Enterprise value is a popular metric that is used by many investors and analysts. The enterprise value formula is relatively easy to calculate and can be a useful tool in your investment analysis.
However, it is essential to remember that enterprise value has some limitations and should not be used as the sole basis for your investment decisions.
To your investing success!