Enterprise value, also called total enterprise value or firm value, is something that investors and others use in business valuation. It is the value that represents the sum total of an entire business. Enterprise value can be helpful for determining the cost of purchasing controlling interest in a business, or for other forms of investment including any type of share purchase, or a more abstract involvement.
Enterprise value is often part of establishing the positions of equity or share holders. Analysts can calculate enterprise value for share to look at the ratio of actual value that a share holder possesses. In theoretical calculations, an enterprise value can represent what it would cost to buy out all of the share holders.
Enterprise value, sometimes abbreviated EV, can be used in conjunction with EBITDA. EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization. This kind of value helps analysts and investors to get a thorough picture of the whole business in relation to its debts and liabilities.
Stock holders can use EV to help look at the comparative returns they can expect from a business investment. Another similar term is WACC, or weighted Average Cost of Capital. WACC represents the average rate a business would have to earn to satisfy its equity holders.
Buyers who want to purchase a controlling interest in a company use various measurements including EV, EBITDA, and WACC to assess the costs and merits of acquisition. Because Enterprise Value or EV is "capital structure-neutral," it can be a good tool for assessing the comparative benefits of several corporate acquisitions. Investors may want flexible tools like an overall EV to conduct business research "at a glance," and then gain a more detailed understanding through more thorough research.
Along with EV and similar measurements, cash on hand estimates and other forms of business valuation provide ways of looking at corporate health. Other relevant issues can include the products or services offered by a business, and the overall strategy of an enterprise. Investors also look at government regulation relative to a specific enterprise to apply foresight to acquisition choices. In a thoroughly diversified economy, it's critical to have complex assessment methods like EV, EBITDA and WACC in order to see how a company may provide secure rates of return to its equity holders over any given time frame. This helps investors and portfolio managers chart a course for the future and to make educated choices about how to maximize profit over time.
