What is Enterprise Value

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The value of a business (enterprise value (EV)) is the market value of capital invested in this company. It gives an indication in relation to operating performance that investors can expect for years to come. Enterprise value is also known as total enterprise value or firm value.

According to a theoretical principle of equality between assets and liabilities, the value of capital invested must be equal to the value of the company (operational entity). The market value is regarded the most current representation and the most appropriate of the actual value.

The corporate value can be due to the balance sheet elements understood in two ways: Company value = assets + working capital = Total equity

For the determination of company value, estimated or calculated book values are applied. For listed companies, it is relatively easy to establish the value on the active (left) side of the balance sheet. The company’s value is thus the sum of market capitalization plus net debt (debt minus cash available).

The capital invested in a company consists of equity contributed by shareholders, and loans advanced to the company at an interest, known as financial debt. Some liabilities positions are not taken into account, such as debts to suppliers if the suppliers do not charge interest.

In this case, the enterprise value is calculated by adding the following: Enterprise Value = market capitalization + net debt + minority interest. In theory, the debt must be calculated to its market value, but this is not always possible. It applies its book value, which is usually an important variation.

Forecast

The value of the company establishes the value that all investors are willing to pay for access to a stake of the company. It informs on the expected market performance of the enterprise as a whole.

In the case of an efficient market, forecasts on the overall market are particularly interesting, since they incorporate all available information. When assessment is made on the basis of the above, the value of the company gives valuable insight into its likely financial future.

In real markets, however, there may be discrepancies between the observed market value and performance that can rationally be expected. This is particularly true if expectations of investors are inadequate, or if the markets are somewhat fluid, or there is a bubble.

Comparisons

The value of the firm depends on the capital structure, it enables comparison of companies whose debt levels is different. Market capitalization is commonly used in three ratios that allow for comparisons between companies in the same sector.

It is considered that if financial markets function properly, the value of an asset depends on the gains that can be expected. In this case, the value of investments is directly dependent on financial results that the company must achieve in the future. By measuring the value of the company, it is possible to have access to forecasts which give investors an idea of its future financial results.
 

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