Enterprise Value: Formula, Calculation, and What It Means for Your Business

Companies look to “enterprise value” when they need a formula to determine what a publicly traded business is worth. It’s a direct valuation metric that is often the starting point—and sometimes the endpoint—for calculating how much to offer when purchasing a company or possible return when selling a company.

What Is Enterprise Value (EV)?

As its name implies, enterprise value (EV) is the total value of a company, defined in terms of its financing. It includes both the current share price (market capitalization) and the cost to pay off debt (net debt, or debt minus cash). Combining these two figures helps establish the company’s EV, indicating a rough purchase price for buying the company.

Enterprise Value = Market Cap + Debt - Cash

Key Takeaways

• Enterprise value calculates the potential cost to acquire a business based on the company’s capital structure.
• To calculate enterprise value, take the current shareholder price—for a public company, that’s market capitalization—add outstanding debt and then subtract available cash.
• Enterprise value is often used to determine acquisition prices and to track company progress against value creation goals.
• It’s also the basis of many metrics that compare the relative value to operating performance and asset returns of different companies.

Enterprise Value Explained

The first time people see the EV formula, they tend to have the same reaction: Huh? Why would you add money a company owes to its value and subtract cash on hand? After all, a company with more cash should be more valuable than one with less, all other things being equal—and that’s true.

But remember that EV is a financing calculation—the amount needed to pay to those who have a financial interest in the firm. That means everyone who owns equity (shareholders) and everyone who has loaned it money (lenders). An acquiring party must cover the cost of stock and then pay off the debt, but it gets the company’s cash reserves upon acquisition. Receiving that cash ultimately means paying that much less to buy the company. That’s why the acquisition target’s EV calculation adds the debt but subtracts the cash.

How Does Enterprise Value Work?

EV is a more complete way to assess a company’s value than simply looking at its net assets, aka net worth, on its balance sheet. This is because EV works by beginning with market cap, which builds in several important valuation aspects that traditional balance sheets can miss. For example, assets on the balance sheet are valued at historical costs, which may not reflect their current market value. EV incorporates updated market perceptions of value through the current stock price. Along the same lines, EV also indirectly captures the value of a company’s intangible assets, like brand strength and intellectual property, which are often not fully captured or excluded from the balance sheet. These factors can play a big role in a company’s ability to generate profits, and they’re typically reflected in the market price of its stock. In addition, EV works by including market-based expectations, such as investors’ outlook of the company’s future earnings potential, and market dynamics, such as sector trajectory and competitive landscape, none of which are considered in historical financial statements.

Another important way that EV works is through its focus on debt. While greater debt technically increases EV, it’s useful to isolate and analyze it as part of the valuation, since higher debt doesn’t necessarily make a company more attractive and may, in fact, add additional risk. For this reason, EV is a key part of several other financial ratios used to help add context to company value. (More on these later.)

What Does EV Tell You?

Conceptually, EV provides a realistic starting point for what is needed to spend to acquire a public company outright. In reality, it typically takes a premium to EV for an acquisition offer to be accepted. This is for a few reasons.

• Deal premium:

  The company’s board might demand a premium to its current share price; otherwise, why should they sell?

• Supply and demand:

  When an acquirer starts buying stock, the economic principles of supply and demand typically kick in, driving up the share price—all other things being equal.

• Competitive bidding:

  Sometimes multiple bidders emerge, leading to a significant premium or even a bidding “war.”

Why Is Enterprise Value Important?

EV is a pervasive tool for investors, analysts, and company leadership for assessing company worth, making comparisons, and informing investment and business decisions. Here’s why.

• Investment opportunities: EV is a relatively simple calculation that allows investors to quickly screen multiple opportunities. When used in conjunction with other financial metrics to create valuation ratios (such as EV/EBITDA or EV/sales), it can help identify potentially overvalued companies to avoid and highlight potentially undervalued opportunities for further investigation. EV can also be applied to other types of investing, when evaluating companies for investing in individual stocks, or when considering private equity/credit investments.
• Mergers and acquisitions: EV’s role in mergers and acquisitions is so ingrained that it is sometimes called “the takeover price.” It shows acquirers the total financing needed for a deal, including the cash required to pay shareholders and the debt to be assumed or refinanced. In practice, however, it is more often the starting point for negotiations.
• Company comparisons: EV is useful to compare companies with different capital structures, especially when comparing companies in the same industry that may have different levels of debt or cash. When combined with various ratios, EV can show relative valuations of companies of differing sizes within an industry. It is also used when valuing companies across industries. For example, a manufacturing company with significant tangible assets will be evaluated differently than tech companies which may not have many tangible assets. In addition, EV eliminates valuation issues that are influenced by different accounting practices or standards, which is particularly relevant for companies in different countries.
• Holistic company valuation: EV is considered one of the most comprehensive metrics for company valuation because it takes into account three key variables: market capitalization, debt, and cash. This makes it more complete than many other single-factor valuation methods. Together, these components establish a baseline value for the target company. Including debt is particularly critical because an acquiring company will have to either assume or pay it off. What’s more, recognizing the cash offset makes the valuation more realistic. The EV formula can also be adjusted to reflect more complex equity and debt scenarios, making its valuation even more accurate in reflecting claims on a company’s resources. For example, it can incorporate adjustments for minority interests in subsidiaries, since those shareholders are entitled to compensation, as well as adjustments for unfunded pension liabilities and preferred stock.

Enterprise Value (EV) Formula and Calculations

A company’s EV is not reflected solely in its shareholder contribution (the amount of money contributed to a business by shareholders); it also considers company debt, both short- and long-term, and cash reserves. Here’s how to calculate it, step-by-step:

Step 1: Calculate the market cap

Pundits often discuss a company’s stock price and whether it has gone up or down. This sometimes makes for great entertainment, but the actual price of a share of a stock is meaningless in terms of understanding a company’s value without additional data, particularly how many shares are outstanding. The market cap is the total dollar value of the company’s outstanding shares. As a simple example, Company A’s stock trades at $100 per share and has 100 million shares outstanding. Calculate the market cap using the following formula:

Market cap = Share price x Number of outstanding shares

Company A’s market share is $10 billion ($100 x 100 million shares).

Step 2: Add the total debt

Add up the company’s total debt, which includes both short-term and long-term debt, as well as interest-bearing debt and obligations that the acquiring company must assume as part of the capital structure. However, operating debt, like accounts payable, is typically ignored. The debt amounts can be found in the liabilities section of a balance sheet, with descriptions such as short-term borrowings, long-term debt, notes payable, and bonds payable. In addition, new accounting rules may indicate adding “right of use” operating lease obligations. Company A has $50 million in long-term debt and a $25 million note payable, for a total debt of $75 million. This amount will be added to the market cap in step 4.

Step 3: Tally the cash

Tally up the company’s cash and cash equivalents. Then subtract the total from the sum of the market cap and debt in step 4. Cash and cash equivalents are the highly liquid funds that the acquiring company would gain. This information can be found on a balance sheet as cash on hand, marketable securities, and other short-term investments, listed in the current assets section. Company A has $10 million in cash on hand.

Step 4: Calculate EV

Use the information from steps 1 through 3 in the EV formula.

EV = Market cap + Total debt – Cash and cash equivalents

Company A’s EV is $10.065 billion (= $10 billion + $75 million – $10 million).

Example Enterprise Value Calculation

The following hypothetical example demonstrates how and why EV might be calculated for a business. GreenGrow Organics Inc. is a midsize organic food producer that specializes in sustainable farming practices and healthy, organic packaged foods. It has been in business for 10 years and recently went public. GreenGrow’s CFO calculated EV for a Q1 board meeting to provide a snapshot of the company’s value.

GreenGrow’s financial data as of March 31, 2025:

• Outstanding shares: 20 million
• Stock price: $25 per share
• Total debt: $75 million
• Cash and cash equivalents: $30 million

EV calculation:

EV = Market cap + Total debt – Cash

The CFO reported that GreenGrow’s EV as of March 31, 2025, was $545 million [(20 million x $25) + $75 million – $30 million]. The board used this information to assess how the market values the company compared to the pre-IPO estimates from investment bankers.

The Limitations of Enterprise Value

The main limitation of EV appears when comparing dissimilar companies. EV holistically quantifies how much a company would cost to take over, rather than simply its value in terms of market capitalization. If two companies have the same market cap but one has significant debt while the other has significant cash reserves, the company without the debt would cost less to acquire.

However, EV doesn’t consider how companies make use of the debt they carry. A software company with significant debt and few cash reserves may be a less attractive investment than a company with a similar market cap and no debt, but the investment decision wouldn’t be as clear-cut when deciding between different industries. A utilities company or auto manufacturer—or any other capital-intensive industry—would likely need to incur a significant amount of debt to finance the capital needed to generate revenue.

Similarly, EV is more useful when comparing companies at similar stages of growth; companies in a phase of high growth are less likely to have as much debt as a more mature company.

Calculations That Use Enterprise Value

Analysts often use EV as part of several EV-based ratios to address the limitations described above and gain deeper insights. These ratios help give additional context to a company’s value relative to its financial performance and assets, allowing for better comparisons across different industries and growth phases. Each of the five common EV ratios uses EV as its numerator and then swaps out the denominator to measure earnings, cash flow, revenue, and assets. Two pro tips for using these calculations are to confirm alignment of numerator and denominator fiscal periods and to use multiple ratios for more rounded perspectives.

EV/EBIT

This ratio compares a company’s total value to its operating profit. EBIT stands for earnings before interest and taxes, which is a measure of profit that strips out the impact of a company’s debt and tax situation. It is used to compare companies with different capital structures, whether debt- or equity-funded or in different tax jurisdictions. A lower ratio might indicate that a company is undervalued, or it may signal that the market has low growth expectations. EV/EBIT is particularly useful in M&A scenarios as it gives a valuation multiple of how many years it would take for the operating profit to cover the EV. Note that this ratio doesn’t work when EBIT is negative, which can happen with unprofitable companies.

EV/EBITDA

This ratio also compares a company’s total value to a further refined version of operating profit—EBITDA. EBITDA is defined as earnings before interest, taxes, depreciation, and amortization. In addition to peeling back the impacts of capital structure and taxes, EBITDA also adds back noncash expenses of depreciation and amortization to net income. As a result, EV/EBITDA is particularly useful in capital-intensive industries and for companies with significant intangible assets. It is also widely used for comparing companies across different industries, especially with varying levels of capital investments. Similar to EV/EBIT, a lower EV/EBITDA ratio might suggest undervaluation or lower growth expectations. This ratio has limited use for unprofitable companies and those without significant depreciation and amortization expenses.

EV/Free Cash Flow

Looking at EV compared to free cash flow shows a company’s ability to generate cash for its owners. Free cash flow represents the cash remaining after accounting for capital expenditures and working capital needs. Basic free cash flow is calculated by subtracting capital expenditures from operating cash flow, both of which are reported on a company’s cash flow statement. A lower ratio is interpreted to mean that the company is efficiently converting its value into cash flow. EV/free cash flow is particularly useful for evaluating mature companies because they tend to have predictable cash flows and stable capital spending. It’s important to note that free cash flow can fluctuate significantly due to timing of capital expenditures and cause EV/free cash flow to undervalue growing companies that are heavily reinvesting in their business.

EV/Sales Ratio

Comparing EV with sales shifts the focus from profit to revenue. Revenue, or sales, is the top line on an income statement, representing the amount of money a company receives from its customers in exchange for its goods or services. This ratio has universal appeal when comparing companies within the same industry, where business models and cost structures are more closely aligned. Moreover, it’s especially useful for valuing early-stage or high-growth companies that may not yet be profitable. A lower ratio might suggest undervaluation, but it can also indicate market concerns about weak profit margins or limited growth potential. The obvious limitation of EV/sales is that it ignores profitability; a company with high sales but poor margins might appear attractive using this metric alone.

EV/Total Assets

Total assets represent everything a company owns that has economic value and are presented on a company’s balance sheet. They include both current assets, such as cash, inventory, and accounts receivable, and non-current assets, like property, plant, equipment, and long-term intangible assets. The ratio measures how efficiently a company uses its assets to create value. A lower ratio might indicate that the company is undervalued because the market isn’t giving credence to the value of its assets or their potential. Alternatively, it may simply mean that the company is asset-heavy relative to its market value. When analyzing different companies, take note of their accounting practices since they can skew total asset values, especially regarding inventory, fixed assets, intangible assets, and other big-ticket assets.

How Is Enterprise Value Different Than Market Cap?

For businesses with either material cash reserves or debt, EV is a more thorough calculation that provides clearer insight into the real value of the business than market cap. As the table below illustrates, companies with identical market caps may have vastly different EVs based on their cash and debt positions.

Now let’s use two real-world market cap and EV calculations to illustrate the point, using Nike and Home Depot.

In Nike’s case, the company’s EV is very close to its market cap because its debt and cash are very similar. Nike’s SEC Form 10-K for the year ended May 31, 2024, showed $11.47 billion in outstanding debt and $9.86 billion in cash and equivalents, so its EV would be roughly $1.61 billion more than its market cap ($11.47 – $9.86). That may sound like a large number, but it’s less significant once you calculate Nike’s market cap. As of May 31, 2024, Nike shares traded for $93.30, and 1.53 billion shares were outstanding. Therefore, Nike’s market cap was about $142.34 billion. Adding $1.61 million of net debt (debt-cash) gets Nike an EV of $144.36 billion—about 1% more than its market cap.

For Home Depot, however, the difference was more significant. Home Depot’s last 10-K for its year ended Feb. 2, 2025, showed $62.29 billion in outstanding debt and $1.66 billion in cash—which means adding $60.63 billion in net debt to the company’s market cap to calculate EV.

Home Depot’s market cap at its year end was approximately $406.66 billion (price per share of $409.38 x 993.36 billion shares outstanding). This yields an EV of $467.29 billion. In other words, Home Depot’s EV was 15% greater than its market cap ($467.29 billion vs. $406.66 billion) because Home Depot had significantly more debt than cash on hand.

How to Use Enterprise Value as an Acquirer

For potential acquisitions of public companies, EV gives a sense of the debt and short-term assets associated with the business and how they might influence the offer.

Consider two public companies that are equally attractive prospects. Company A has a market cap of $400 million, while Company B’s market cap is $460 million, so the expected price for Company B is $60 million. But after applying the EV formula, it’s clear that while neither company has debt, Company A has $20 million in cash reserves and Company B has $80 million. Thus, their EVs are equal. Offering $60 million more for Company B can still be justified, however, because its balance sheet would offset the higher price.

How to Use Enterprise Value When Evaluating Acquisition Offers

This is where things get interesting. When evaluating several acquisition proposals with offers for stock rather than cash, sellers must compare the value of the stock offers to the EV of each potential buyer. Specifically, if a would-be acquiring company has a lot of debt on its balance sheet and minimal cash, this would increase the EV. In addition, some industries are more capital intensive than others, so companies in those industries tend to be highly leveraged.

If the acquirer is trying to use its share price at face value in its acquisition offer, a seller can push back and demand more shares, or shares plus cash, to achieve a deal based on the buyer’s EV.

This becomes more important if the acquiring company is small-cap—that is, its market capitalization is between $300 million and $2 billion—and its shares are only lightly traded. Such shares are less liquid, as they may not sell as easily as a larger company’s shares or at the expected price. If a company is being acquired and can’t sell stock right away, then the financial strength of the acquiring company should matter, but EV doesn’t indicate that.

It’s also worth noting that unless the acquired company remains a separate legal entity, it does not share responsibility for debt. The corporate entity as a whole owns the debt. Enter the deal only if there is high confidence of servicing the debt. Obviously, each situation is different, but a scenario analysis exercise evaluated by financial and legal advisors is necessary before signing a deal.

Why Does This Matter for Your Business?

Understanding EV can be helpful in a number of situations, especially when looking for potential acquisitions or when evaluating stock-based acquisition offers. It’s also an important concept when looking at calculations for valuation multiples. EV to EBITDA, for example, is a commonly used multiple for comparing the performance of different but similar businesses, and EV is used in many other multiples as well. Explore more ideas for applying EV to an organization in “How to Use EV and Valuation Multiples to Drive Business Value”.

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NetSuite Financial Management provides all the accurate, up-to-date financial data needed to evaluate EV. The cloud-based, unified data source keeps decision-makers on the same page and working together to better manage capital and identify value-driving opportunities. Its accounting module makes certain that transactions are recorded in accordance with the most current standards accurate EV calculations and EV ratios analysis. The financial reporting features make these metrics easy to monitor and analyze, with customized reports that deliver specific highlights. Finally, the planning and budgeting module makes modeling and running what-if-scenarios faster and smarter, using embedded AI and machine learning capabilities.

Enterprise value is one of the more comprehensive ways to evaluate a business’s worth. It is a market-driven approach to valuation, incorporating investor sentiment through its use of market capitalization. In addition, it factors in the effects of debt and cash, which can impact potential costs, risks, and liquidity. Despite its comprehensiveness, EV is relatively simple to calculate and incorporate into other ratios, making it a good filter when considering investment opportunities and evaluating mergers or acquisitions.

Enterprise Value FAQs

Why do businesses deduct cash from enterprise value?

Enterprise value is a commonly used metric that defines the prospective cost of acquiring a business. Because the cash the business has on hand effectively goes to the new owner, it lowers the relative cost to acquire it.

Why do businesses add debt to enterprise value?

Adding debt to enterprise value works on the same principle as deducting cash. Because EV serves as the cost to acquire a business, debt would be an added cost to the acquisition while cash would be deducted from that cost.

Can enterprise value be less than equity value?

Enterprise value can be less than the equity value for companies with net negative debt, or companies with a cash balance greater than its debt.

Why do businesses use enterprise value?

Businesses use enterprise value (EV) to gauge the cost of acquiring a company, particularly when they have different capital structures. Because EV accounts for more than just its outstanding by adding debt and subtracting cash from the cost, it allows for companies to determine how much a company is worth.