Articles on Stock markets

Enterprise value is an amount that would have to be paid for a company to acquire all of its equity and debt.

It is notable that cash and cash equivalents are left out of this equation since that amount is netted out of a cash purchase. The basic formula for enterprise value is market capitalization + debt obligations and any minority interests or preferred shares.

This regularly appears in the numerator position in the EV/EBITDA ratio. Often investors can just look at the market capitalization of a company to get an estimation of the size of the company.

Market cap, of course, only uses the price per share and multiplies it by the number of outstanding shares, and while this may give somewhat of an idea of how much it would take to acquire a company, it does not take into consideration the sizable amount of debt that the company holds.

Not only would you have to pay off the owners (shareholders) of the company, but the creditors of the company would expect to be paid off as well. This is why EV adds debt obligations back into the equation: an acquirer would have to be willing to pay those debts in addition to any amounts paid for the equity.