Glossary
Enterprise Value
The total cost to buy a whole company, debt included
Enterprise value is what it would actually cost to acquire a whole company: market capitalisation plus net debt. It is the price of buying all the shares and assuming the debt.
This is why market capitalisation alone is insufficient. Two companies with identical market caps require completely different sums to acquire if one is debt-free and the other heavily borrowed.
Cash held is subtracted, because acquiring the company also acquires its cash, reducing the real cost. A cash-rich company can have an enterprise value below its market capitalisation.
The figure is used mainly in multiples. Enterprise value divided by EBITDA compares companies with different capital structures more fairly than a price-earnings ratio does.
It is the standard concept in merger discussions. The answer to what is this company worth is enterprise value, not the share price. It is useful for individual investors too. A company sitting on large cash reserves can look expensive by share price yet be cheap on enterprise value — something a price-earnings ratio alone misses.