Enterprise Value is the total cost to acquire a company.
The Enterprise Value of a company is the amount that would have to be paid for full ownership of it, which would include market capitalization (price per share x shares outstanding) + net debt (all liabilities - cash and equivalents).
Market cap alone is technically just shareholders equity, and not capital from debt, so Enterprise Value adds that in for consideration. Enterprise value is the numerator in EV/E (Enterprise Value over EBITDA), a very common valuation ratio.
Enterprise value and its associated ratios are fundamental analysis tools which can be used to compare companies with different capital structures; e.g. one with a lot of debt on the books and the other with mostly equity shares.
Cash is taken out of the equation since in an acquisition transaction the net cost would be reduced by the amount of cash purchased dollar for dollar, since that amount of cash would immediately be in the purchaser’s hands again. Preferred stock is considered debt for the purposes of this calculation.
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