Glossary
Enterprise value (EV)
Market capitalization plus debt minus cash; a fuller measure of what it would cost to buy a whole business.
On this page
Enterprise value (EV) estimates the price of an entire operating business, owed to both shareholders and lenders, rather than the price of the equity alone. It starts from market capitalization, adds the debt an acquirer would have to take on, and subtracts the cash it would get with the company. Analysts use EV because two firms with the same market cap can be very different bargains once their balance sheets are counted.
How it works
The simple version, market cap plus debt minus cash, covers most companies. Preferred stock and minority (noncontrolling) interest are added when they are material, because they are also claims on the business's cash flows.
Why it matters
EV pairs naturally with measures earned before interest is paid, such as EBITDA, EBIT and revenue, because those flows belong to all capital providers. That is the logic behind EV/EBITDA. Pairing EV with net income or EPS mixes a debt-inclusive numerator with an after-interest denominator and distorts comparisons.
Two cautions: definitions of debt vary (some analysts include lease liabilities, some do not), and EV can be negative when a company holds more cash than its market value plus debt, which usually flags an unusual situation rather than a free lunch.