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Concept
Enterprise value
Summary
Enterprise value (EV), total enterprise value (TEV), or firm value (FV) is an economic measure reflecting the market value of a business (i.e. as distinct from market price). It is a sum of claims by all claimants: creditors (secured and unsecured) and shareholders (preferred and common). Enterprise value is one of the fundamental metrics used in business valuation, financial analysis, accounting, portfolio analysis, and risk analysis.
Enterprise value is more comprehensive than market capitalization, which only reflects common equity. Importantly, EV reflects the opportunistic nature of business and may change substantially over time because of both external and internal conditions. Therefore, financial analysts often use a comfortable range of EV in their calculations.
For detailed information on the valuation process see Valuation (finance).
Enterprise value =
common equity at market value (this line item is also known as "market cap")
debt at market value (here debt refers to interest-bearing liabilities, both long-term and short-term)
minority interest at market value, if any
preferred equity at market value
unfunded pension liabilities and other debt-deemed provisions
– value of associate companies
– cash and cash equivalents.
A simplified way to understand the EV concept is to envision purchasing an entire business. If you settle with all the security holders, you pay EV. Counterintuitively, increases or decreases in enterprise value do not necessarily correspond to "value creation" or "value destruction". Any acquisition of assets (whether paid for in cash or through share issues) will increase EV, whether or not those assets are productive. Similarly, reductions in capital intensity (for example by reducing working capital) will reduce EV.
EV can be negative if the company, for example, holds abnormally high amounts of cash that are not reflected in the market value of the stock and total capitalization.
All the components are relevant in liquidation analysis, since using absolute priority in bankruptcy all securities senior to the equity have par claims.
Official source
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