Enterprise value (EV), a more complete alternative to equity market capitalization, evaluates a company’s overall value.
In addition to a company’s market capitalization, short- and long-term debt, and any cash on the balance sheet are all taken into account when calculating enterprise value.
Numerous financial statistics that gauge a company’s performance are based on enterprise value.
Many people believe that enterprise value (EV), which differs greatly from plain market capitalization in a number of respects, is a more accurate indicator of a firm’s value. EV informs investors or other interested parties of a company’s value and how much would be required to acquire that company. A company’s EV may be negative if the sum of its cash and cash equivalents exceeds the sum of its market capitalization and loans. This is an indication that a business is not making the most use of its resources since there is too much cash lying around. Extra money can be used for a variety of purposes, including dividends, buybacks, growth, R&D, upkeep, pay hikes for employees, bonuses, and debt repayment.
EV = MC + Total Debt-C
where MC=Market capitalization, which is determined by multiplying the stock price at the time by the number of shares still outstanding.
D-Long-term debt and short-term debt together equals total debt.
C-The liquid assets of a corporation are cash and cash equivalents, which may or may not also contain marketable securities.