How is Enterprise Value (EV) calculated?

Enterprise Value (EV) is a comprehensive measure used to assess the total value of a business, considering its equity and debt obligations. The calculation involves several components that reflect a company's overall financial situation and is critical for valuation purposes.

The correct method to calculate EV comprehensively includes the following elements: the market capitalization of the company, preferred stock, total debt, minority interest in subsidiaries, minus cash and cash equivalents.

Starting with market capitalization provides the equity value of the company, while adding preferred stock acknowledges claims on assets that rank senior to common equity. Including total debt gives you insights into the obligations the company has towards creditors. Furthermore, incorporating minority interest reflects the value attributable to non-controlling interests in other companies that the business may own. Finally, subtracting cash and equivalents is vital because cash and marketable securities can be used to pay down debt, hence should not be part of the enterprise valuation.

This approach gives a holistic view of the company's value, essential for potential acquirers and investors seeking to understand the firm's overall financial health.