Enterprise value (EV) is a comprehensive stock valuation measure. It is equal to the company’s market capitalization including preferred shares, plus minority interest in the company, plus the total debt, less cash. Management uses the EV to anticipate a possible merger and acquisition, and investors use it to value companies.
Applying the EV
Market cap is the total value of all outstanding common shares. Different companies with the same market cap can have different amounts of leverage and cash on hand, which affects the companies’ value. EV captures this difference and adds the market value of preferred shares.
Minority interest in the firm is also called non-controlling interest. When a corporation owns a partial stake in a subsidiary that is greater than 50%, when calculating the EV, investors add the remaining ownership because the parent must account for 100% of the subsidiary’s financials on its balance sheet.
Also, EV subtracts cash because investors generally agree that holding unused cash to excess is viewed unfavorably. However, adding debt may be problematic. Some companies may use it to finance growth, while others may use it to pay otherwise avoidable expenses. EV inherently treats all debt the same regardless of its use.
EV Multiples
Wealth managers compare EV with other measures of financial performance, such as sales, EBIT, EBITDA, and NOPAT.
EV/sales measures the company’s total capitalization relative to total sales.
To provide a comparison to earnings, investors may calculate EV/EBIT and EV/EBITDA. EBIT is the earnings before interest and taxes, and EBITDA is the earnings before interest, taxes, depreciation, and amortization. Likewise, EV/NOPAT provides a comparison to the net operating profit after tax, which is EBIT net of income taxes.
Getting Started
Our financial advisors compile a wealth of information to value stocks. To get started building a portfolio of reputable stocks, contact the experts at First State Investment Advisors today at (918) 492-1361.
This overview is for informational purposes only and is not a recommendation. It should not be the sole deciding factor in making an investment. Investing is a risk and, as with all risks, a positive return is not guaranteed. Past performance does not indicate future results.