While buying shares, whenever we research the shares of a company, we also get to see the Enterprise Value there. But many investors who are new to the stock market do not understand what is Enterprise Value?
Due to a lack of information about this, many doubts often arise in the mind of the investors. That is why in today’s article we are going to get information about Enterprise Value. Yes friends, if you want to know what is Enterprise Value and how it works, then you must be with us till the end of this article.
What does Enterprise Value Mean | What is Enterprise Value?
Enterprise Value is called Enterprise Value in Hindi. Enterprise Value The valuation of the company is calculated by taking into account both equity and debt. It is used to compare companies of different sizes and is a great tool for value investors to get an idea of the profit and loss of a company.
Often whenever we do research about a business, we see the Market Capitalization of the company, but through Enterprise Value Company, we can get information about the market value of the company. Market Capitalization of the company includes only the equity of the company while Enterprise Value includes both the debt and equity of the company.
What is Enterprise Value Formula | What is Enterprise Value Formula
Simple Formula –
EV = Market Capitalisation + Market Value of Debt – Cash and Equivalents
Extended Formula –
EV = Common Shares + Preferred Shares + Market Value of Debt + Minority Interest – Cash and Equivalents
With the help of both these formulas, any investor can calculate the EV of the company. All it takes is the investor to gather the market capitalization of the company, the market value of debt, and the value of any cash and investments on the balance sheet.
You can get information about all these things by looking at the financial statement of a company. Once you have gathered all these essential values, plan them in the given formula and you will have Company Enterprise Value.
एंटरप्राइजवैल्यूका उदाहरण | Enterprise Value Example
Many times people are unable to understand Enterprise Value by reading its definition, that is why we are here to explain to you the meaning of Company Enterprise Value with examples. For example, suppose the financial statement of Company XYZ is as follows –
- Market Capitalization -1000
- Total Debt on the company – ₹ 500
- Total cash and other assets with the company – ₹ 200
- Minority interest of the company – ₹50
- Preferred Share of the company – ₹ 100
So now here we will calculate the Enterprise Value of the company in this way –
1000+500-200-50+100 = 1350
Thus, the enterprise value of the company will be Rs.1350. So here you can also see that Enterprise Value takes into account the debt and cash holdings of the company. Let us also tell you that the Market Capitalization of any company is the amount in which you have to buy the company, while the Enterprise Value of the company is so that you can understand how much debt the company has and how much cash it has etc..
What is the Importance of Enterprise Value while Buying Shares?
Through the information given below, you will be able to understand why the Enterprise Value and Equity Value of the company are seen before buying the shares.
• EV is more important than normal market capitalization because many people who want to buy the company or invest in the company’s stock can see the real value of the company.
• Sometimes the market capitalization of the company is high but its Enterprise Value is quite negative. So that we get the right information to invest in the cities of the company.
• EV/EBITDA Through this, it is known how a company is using its assets and how much cash it has.
• Seeing the Enterprise Value of any company gives us the right direction to buy the company’s shares and we can ensure our profit in the right way.
What is the Meaning of EV/EBITDA Multiple?
Many times we get to hear about Enterprise Value as well as EV/EBITDA, so we understand this as well.
Actually, EV/ EBITDA is a ratio, which is used to measure the value of the company. Ev/EBITDA has EV Enterprise Value which is the market value of the company’s equity and its debt.
Also, “EBITDA” in EV/Ebitda stands for Earnings before Interest, Taxes, Depreciation, and Amortization. It is used to compare the value of a company with its earning power.
EV/EBITDA ratio is also useful because it takes into account the debt level of the company. The market value of a company with a high debt level may be low, but if the company’s income is sufficient to repay its loan, then investing in it can also be considered good.
This ratio helps investors understand whether a company’s debt level is manageable in relation to its earning potential or not. If the EV/Ebitda Ratio of a company is low, it means that the valuation of the company is low.
If this EV/Ebitda Ratio of a company is high then it would mean that the company is doing very good growth.
Can Equity value Exceed Enterprise Value?
Yes, Equity Value can be less than Enterprise Value and can also be more.
Why is Enterprise Value negative?
If a company has more cash than market capitalization and debt value, then the enterprise value is negative.
In today’s episode, we discussed What is Enterprise Value? Hopefully, through this article, you would have been able to get all the information about the Enterprise Value of the company. If you want to get more information on this topic or want to ask any other questions related to this topic, then please tell us by commenting.