Enterprise value

Market cap tells you what the equity costs. A buyer of the whole company also takes on its debt and gets its cash, so the true price of the business is different. Enterprise value captures that.

Why it matters for comparisons

Two companies with the same market cap can be very different purchases: one may carry heavy debt, the other may hold a pile of cash. EV puts them on the same footing, which is why it is paired with measures that belong to all providers of capital, such as EBITDA, operating profit and sales. EV/EBITDA and EV/sales compare businesses regardless of how they are financed.

What to include

The basic formula uses total borrowings and cash. A fuller version also adds minority interest and preference capital, many analysts add lease liabilities, and investments that are not part of the operating business are subtracted. Be consistent: if you include lease liabilities in EV, use EBITDA before lease costs too. Use consolidated figures, because subsidiaries often hold debt or cash that the standalone accounts do not show.

Negative EV

When a company holds more cash than its market cap plus debt, EV is negative. On paper you would be paid to own the business. This is rare and usually has an explanation, such as cash that is trapped in a subsidiary, needed to run the business or likely to be spent badly, so check before treating it as a bargain.

Where to find it

Market cap comes from the exchange. Borrowings, cash and cash equivalents, and current investments come from the consolidated balance sheet in the annual report or the latest half-yearly results.

Common mistakes

• Pairing EV with net profit or EPS. Net profit belongs to shareholders only, so compare it with market cap, not EV.
• Using standalone figures for a group. Switching between standalone and consolidated can change EV dramatically.
• Applying EV to banks. For a lender, deposits and borrowings are raw material, not financing, so EV has little meaning; banks are valued on price to book and ROE.

Questions investors ask

Is a low EV/EBITDA always cheap? Not always. It can reflect low growth, heavy capital needs or earnings at a cyclical peak. Compare it with similar companies and with the company's own history.

Why can EV be larger than market cap? Because the company has more debt than cash. A buyer pays for the equity and takes on the net debt as well.