When we talk about a company's value, we often talk about its market capitalisation. That's the total number of outstanding shares in a company, multiplied by the share price of that company.

Enterprise value is also a measure of value, but it's a ‘lil different, Flux fam. This is because EV takes into account the company's debt, and any cash or cash equivalents on the company’s balance sheet.

Why do we need enterprise value?

Enterprise value is a useful valuation for potential buyers of a business because it is an estimate of what it would cost to purchase a company. 

It begins with market capitalisation (share price x the number of shares), as a measure of purchasing all of the company’s equity. 

But, because all debts would need to be paid off, the debt amount is added to the market cap. 

Finally, any cash (or cash equivalents) are assumed to also be bundled with the sale of the company. That means, the company's cash is subtracted from the purchase price (because it would offset some of that purchase price)

When an investor purchases a company, they’ll have to pay off any outstanding debts, but all cash and cash equivalents are transferred over to them.

Run the numbers for me, Flux

The formula for enterprise value is: market cap + total debt - cash

So, if company A has:

• A market capitalisation of $100,000
• Debts worth $20,000
• Cash or cash equivalents worth $5,000
  

Enterprise value = $100,000 + $20,000 - $5,000 = $115,000

While market cap might look better, enterprise value is actually a more accurate and comprehensive representation of a company's worth.