Are you trying to figure out what a company is really worth? If so, one of the main ways to do it is to use Enterprise Value (EV). Whether you work as an investor, run a business, or study financial data, it’s important to know how to look at a company’s total value.
EV looks deeper than basic market value; it adds in factors like debt, cash, and other details that can play a big role in key financial choices to give you a more complete view of a company’s true value. Smart investors and business owners often rely on EV to guide decisions regarding mergers, acquisitions, and long-term investments.
So how do you calculate it? And why is it so important? Let’s go through the formula, why it’s useful, what parts it makes up, and where it applies. This will help you see how EV can give you a clear and robust view of a company’s financial strength.
What is enterprise value?
Enterprise value is a major way to measure the value of a company in corporate finance, along with equity value. Enterprise value shows how much the actual operating business is worth, regardless of how it is financed. Equity value (often called market capitalization) reflects the portion of ownership owned by owners or shareholders, usually expressed on a per-share basis for public companies.
For valuation purposes, enterprise value focuses directly on the company’s core functions and, unlike equity value, is not affected by financing choices. Factors that influence it include the company’s performance, industry conditions, and broader economic trends. This distinction between enterprise value and equity value is important for analysts who want to evaluate a company without the influence of its capital structure. A business plan for acquiring another company typically focuses more on its revenue, cost setup, and the products it offers. This focus exists because the acquiring company can change the target’s capital structure (how it raises money) after taking ownership.
How Enterprise Value (EV) Works
Enterprise Value (EV) differs from basic market capitalization in several important ways, and many people see it as a clear picture of a company’s true value. EV helps investors or anyone interested understand what a business is really worth and how much it would need to pay if another company planned to buy it.
A company’s EV can become negative when the amount of cash and cash-like assets a company has exceeds the combined value of its market cap and total debt. This usually indicates that the company is not making good use of its resources – it has excess cash sitting idle. A business can use the excess cash for many useful purposes, such as distributions, share buybacks, growth plans, research and development work, maintenance, employee pay increases, bonuses, or the repayment of existing debt.
Enterprise Value takes numbers from a company’s financial reports and current market prices. The main components that make up EV include:
- Market cap: The total value of all of a company’s outstanding common and preferred shares
- Debt: The combined amount of long-term and short-term borrowings
- Preferred equity: Preferred shares are also considered because they represent claims on the company’s equity that are not included in market cap
- Minority interest: The value of equity in a subsidiary where ownership is less than 50%
- Cash and cash equivalents: The total amount of cash, CDs, drafts, money orders, commercial paper, marketable securities, money market holdings, short-term government bonds, or Treasury bills that a company holds.
Enterprise Value (EV) Formula and Calculations
A company’s EV comes from more than just the investment that shareholders have made in the business. It also includes the company’s overall debt – both short-term and long-term – and how much cash it has. You can analyze EV using a clear, step-by-step method, as shown below:
Step 1: Calculate Market Cap
People often talk about a company’s stock price and whether it’s going up or down. While this sounds interesting, the price of a single share doesn’t tell you anything about the company’s value unless you also look at how many shares are in existence. Market cap represents the total value of all outstanding shares.
For example, Company A’s stock is trading at $100 per share and has 100 million shares outstanding. You can find market cap using this formula:
- Market cap = share price × number of shares outstanding
Therefore, Company A’s market cap is equal to $10 billion ($100 × 100 million shares).
Step 2: Add total debt
Now add up the company’s total debt. This includes short-term debt, long-term debt, interest-bearing loans, and any liabilities assumed by the buyer as part of the capital structure. You would typically ignore operating items such as accounts payable.
You can find this amount in the liabilities section of the balance sheet under headings such as short-term debt, long-term loans, notes payable, or bonds payable. Current accounting rules may also require the inclusion of “right-of-use” operating lease liabilities.
In this case, Company A has $50 million in long-term debt and $25 million in notes payable, giving a total of $75 million in debt, which you would add to the market cap in Step 4.
Step 3: Evaluate Cash
Add all cash and cash equivalents. Then subtract this amount from the total market cap and debt in Step 4. Cash and cash equivalents represent liquid funds that would be immediately available to a buyer.
You can find this information on the balance sheet under current assets, which are listed as cash, short-term investments, or marketable securities. Company A currently has $10 million in cash.
Step 4: Calculate EV
Now apply the EV formula using the numbers from the previous steps:
- EV = Market Cap + Total Debt – Cash and Cash Equivalents
Therefore, Company A’s EV is $10.065 billion (= $10 billion + $75 million – $10 million).
Enterprise Value Example
Calculating Microsoft’s Enterprise Value (EV)
As of April 9, 2025, Microsoft had a market capitalization of approximately $3.13 trillion. The company’s total debt was $60.46 billion, up from $29.6 billion the previous year. Its cash and cash equivalents were $17.482 billion as of December 31, 2024.
Enterprise Value (EV) gives a complete picture of a company’s overall value by including its market cap, debt load, and cash balance.
For Microsoft, the EV calculation looks like this:
| Item | Amount (USD) |
| Market Capitalization | 3,130,000,000,000 |
| Total Debt | 60,460,000,000 |
| Cash & Cash Equivalents | 17,482,000,000 |
| Enterprise Value (EV) | 3,173,978,000,000 |
This calculation shows that Microsoft’s enterprise value as of April 2025 was approximately $3.174 trillion.
Microsoft Enterprise Value = $3.13 trillion + $60.46 billion – $17.482 billion
Microsoft EV = $3.173 trillion
Enterprise value gives a complete picture of what a company is truly worth. If someone decides to buy Microsoft at its market cap of $3.13 trillion, they also need to assume the company’s $60.46 billion in debt.
A buyer would need a little more than $3.18 trillion to buy Microsoft. But since Microsoft has $17.482 billion in cash and cash equivalents, that amount helps reduce the debt load, bringing the final cost closer to $3.17 trillion.
FAQs
Q1. What does enterprise value mean?
Enterprise value (EV) represents the total value of a company. It includes more than just market capitalization because it also takes into account things like debt, preferred stock, and minority interest. This helps you see the true value of a company, not just what the share price says.
Q2. What is the formula for EV?
You calculate enterprise value (EV) by adding up market capitalization, long-term debt, preferred stock, and minority interest, then subtracting cash and cash equivalents. This gives a clear picture of the total financial value of the company.
Q3. What does enterprise mean?
In business, an enterprise can mean a structured and purposeful activity or venture. It can be a firm, company, or organization that performs an economic function with the objective of making a profit.
Q4. How do you calculate total enterprise value?
To find total enterprise value (EV), you add up market capitalization, long-term debt, preferred stock, and minority interest, and then subtract cash and cash equivalents. This method helps you understand the full financial value by including both equity and debt.
Q5. What is enterprise value for a private company?
Enterprise value for a private company is the total value of a company by adding up its equity and debt. You get this value by adding up its market capitalization and debt, then subtracting its cash.