Enterprise Value

Enterprise Value
What is Enterprise Value?
Market Value of Equity plus debt minus cash and investments

Why is it used?
To more accurately reflect the value of a company at any one time rather than market capitalization (share price times shares outstanding)

Enterprise Value

Whats the point?

EV measures what it would actually cost to purchase an entire company. It is the real, economic value of the company.

Enterprise Value
Example:
Company A: Equity Value $20 million Debt Value $50 million Cash & Investments $2 million

Price paid for stock: $20 million. Real price paid for the entire company: $68 million  Youre assuming a debt of $50 million, so that is an economic cost.  The cash belongs to the new owners after the old equity holders are paid off.

Enterprise Value Multiples

EV/
EBITDA, EBIT, Net Revenue, Net Income

How do they work?

The ratios measure profitability and revenue generating capability regardless of company size.

Enterprise Value Multiples

So.
Companies can be compared to each other based on these multiples. The lower the multiple, the more earnings you get for your money invested.

Enterprise Value Multiples

Viacom (as of Dec.31, 1999):
Market Cap: $42.6B (.709B shares times $60 per share) Debt: $6.00B Cash & Investments: $0.688B Enterprise Value: $48 Billion  EBITDA:  EBIT:  REVENUE: $2.162B $1.318B $12.86B

Enterprise Value Multiples

Viacom, Inc. Media Company x Media Company y Media Company z Mean Median EV/EBITDA EV/EBIT EV/REVENUE 22.20 36.42 3.73 37.43 26.54 23.22 29.06 26.54 46.45 39.80 35.22 40.49 39.8 5.45 4.78 3.88 4.70 4.78

The implication is that Viacom is undervalued on a comparable company basis