{"id":12248,"date":"2018-01-05T08:42:50","date_gmt":"2018-01-05T16:42:50","guid":{"rendered":"http:\/\/www.marketriders.com\/investing\/?p=12248"},"modified":"2018-01-05T13:03:33","modified_gmt":"2018-01-05T21:03:33","slug":"investor-facts-enterprise-value","status":"publish","type":"post","link":"https:\/\/www.marketriders.com\/investing\/investor-facts-enterprise-value\/","title":{"rendered":"Investor Facts: What Is Enterprise Value?"},"content":{"rendered":"

Enterprise value is a calculation of a company\u2019s total value in dollar terms.<\/p>\n

Figuring out what a company is \u201cworth\u201d can be difficult. Often, investors use market capitalization, the dollar value of the company\u2019s outstanding shares<\/a>, but that number can be misleading.<\/p>\n

A better approach is to calculate that first number, the market cap, and then take into account all of the other negatives and positives that would affect the asking price for a company if a theoretical buyer were to make a cash offer.<\/p>\n

\"enterprise<\/p>\n

The is done by adding the value of the company\u2019s stock, both common stock and preferred shares, and then subtracting the company\u2019s debts.<\/p>\n

Finally, any cash the company has is added back in, since the new owner would immediately control the cash in the company\u2019s coffers, along with assets such as plants, equipment, inventory and receivables.<\/p>\n

Enterprise value is what something is worth. Market cap plus net debt gives a good sense of enterprise value. If a business has a market cap of $1 billion, add the debt of $500 million, then subtract the cash $100 million.<\/p>\n

Essentially the business has an enterprise value of $1.4 billion, so I\u2019m paying $1.4 billion for the business.<\/p>\n

Put another way, if you have a business that\u2019s $100 a share and it has $10 a share of net cash and no debt, you\u2019re really paying $90 a share.<\/p>\n

Enterprise value equalizes things by including how much debt is on the business. Market cap, meanwhile, just tells you the equity<\/a> valuation.<\/p>\n

If it were a house, market cap would tell you how much equity you have, while enterprise value tells you what the house is worth on the market regardless of whether you paid cash or have a big mortgage.<\/p>\n

Market cap equals enterprise value if the debt is zero. Some businesses can be highly leveraged. A company could have $100 million in equity value but $900 million in debt.<\/p>\n

Apples to apples<\/h2>\n

To do a proper valuation, start with earnings before interest, taxes, depreciation, and amortization (EBITDA) compared to enterprise value. That\u2019s how people looking to buy are really looking at the business.<\/p>\n

Net income also has lot to do with how much debt expense a company has. If you compare the price to earnings (PE) ratios two companies but one is heavily indebted, they can\u2019t be compared apples-to-apples.<\/p>\n

Warren Buffett, if you read his writings and his talks with business students, really does look at the business itself. He\u2019s looking at the pre-tax earning power of the business<\/a> when he\u2019s looking at the book value.<\/p>\n

Buffett doesn\u2019t talk about enterprise value but instead reads between the lines. What is the pre-tax coupon of the company? What kind of cash can this throw off?<\/p>\n

MarketRiders, Inc. is a registered investment adviser.\u00a0 Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.\u00a0 Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and\/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.<\/i><\/small><\/p>\n","protected":false},"excerpt":{"rendered":"

Enterprise value is a calculation of a company\u2019s total value in dollar terms. Figuring out what a company is \u201cworth\u201d can be difficult. 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