Enterprise Value
Also written EV · Enterprise Value (EV)
What it would cost to buy the whole business — market capitalisation plus debt, less cash — as opposed to market capitalisation, which buys only the equity.
In plain language
If you bought every share of a company, you would own the equity. You would also inherit its borrowings, which you would have to repay, and its cash, which you could keep.
Enterprise value is that full cost: pay for the shares, take on the debt, help yourself to the cash. It is the honest price tag on the business itself, independent of how the previous owners chose to finance it.
How it works
This is why EV is the right numerator for comparing companies with different balance sheets. Two retailers with identical stores and identical EBITDA can have very different market capitalisations purely because one borrowed to expand. Their enterprise values will be much closer, because EV counts the borrowing.
Cash is subtracted because the buyer gets it back immediately — paying Rs 100 crore for a company holding Rs 30 crore of cash costs a net Rs 70 crore.
The formula
Enterprise value = Market capitalisation
+ Total debt
+ Minority interest
+ Preference capital
− Cash and cash equivalents
Most often used as EV ÷ EBITDA.
A worked example
Two hotel chains, identical EBITDA of Rs 400 crore:
| Chain A | Chain B | |
|---|---|---|
| Share price | Rs 500 | Rs 260 |
| Shares | 12 crore | 12 crore |
| Market capitalisation | Rs 6,000 cr | Rs 3,120 cr |
| Debt | Rs 200 cr | Rs 3,100 cr |
| Cash | Rs 400 cr | Rs 100 cr |
| Enterprise value | Rs 5,800 cr | Rs 6,120 cr |
| EV/EBITDA | 14.5× | 15.3× |
On market capitalisation, B looks half the price of A. On enterprise value, B is the more expensive of the two. The apparent discount was entirely Chain B's debt, which any buyer would have to repay.
Why NISM asks about it
Chapters 3 and 10 both use EV, and Chapter 10 sets EV/EBITDA against P/E as relative-valuation multiples. Expect a question giving market capitalisation, debt and cash and asking for EV or EV/EBITDA, and conceptual questions on when EV/EBITDA is the better multiple.
Common exam traps
- Cash is subtracted, not added. This is the single most common sign error in the chapter.
- Never form EV ÷ net profit or EV ÷ EPS. Enterprise value is a whole-firm number; net profit is what is left for equity. Pair whole-firm with whole-firm: EV with EBITDA, EBIT or sales.
- A debt-free company with large cash reserves has EV below its market capitalisation. That is correct, not an error.
- Use total debt, long-term and short-term together.
Check yourself
1.How is Enterprise Value defined in the workbook?
- a)Market capitalisation plus cash and cash equivalents
- b)Value of equity plus value of debt minus cash and cash equivalents
- c)Total assets minus total liabilities
- d)Value of equity plus cash and cash equivalents minus debt
Show the answer
Answer: (b) Value of equity plus value of debt minus cash and cash equivalents
EV = Value of Equity + Value of Debt − cash and cash equivalents.
The intuition: buying a whole business means paying the shareholders and taking on the lenders' claim — but the cash sitting inside the company comes back to you, so it reduces the effective price.
Option D reverses the signs on both debt and cash, which is the most common error and produces two of the wrong answers in any EV numerical. Option C describes net-worth or book value of equity, a balance sheet number that has nothing to do with market value. Option A double-counts cash in the wrong direction.
This definition earns its place in the "important considerations" list at the end of the chapter: EV, and not the market capitalisation, is the true value of the firm for a private owner.
2.On a standalone basis, if market capitalisation is ₹10 lakh, total debt ₹3 lakh and cash ₹4 lakh, the Enterprise Value is:
- a)₹17 lakh
- b)₹13 lakh
- c)₹9 lakh
- d)₹6 lakh
Show the answer
Answer: (c) ₹9 lakh
EV = [Market Value of common equity of the Parent + Market Value of preferred capital of the Parent + Market Value of Debt of the Parent] − (cash, cash equivalents and non-operating/non-strategic financial investments of the parent only).
10 + 3 − 4 = ₹9 lakh.
Option A adds the cash instead of subtracting it, which is the trap.
Why cash is deducted: a business is funded by various sources of capital, however EV focusses only on the capital that is gainfully employed in the business. Cash sitting idle is not employed in the business — an acquirer effectively recovers it on day one.
On the equity input: it is the market value of common equity, not the book value. In the workbook's worked example the balance sheet shows common equity ₹12.5 crore, but the calculation uses market capitalisation = 340 × 10,00,000 = ₹34 crores instead.
And for unlisted components: since it is difficult to obtain fair market value for unlisted securities and bank debt, analyst may use the balance sheet values as a proxy if the fair market value is not available.
The consolidated version additionally includes the value of non-controlling interest and the subsidiary's preferred capital and debt, less the subsidiary's cash and non-operating investments.
3.Why can the P/E, EV/EBITDA and EV/EBIT multiples not be applied to certain companies?
- a)Because they only work for listed companies
- b)Because the multiple cannot be applied where the underlying profit metric is negative
- c)Because SEBI prohibits their use in published research
- d)Because they require at least ten years of financial history
Show the answer
Answer: (b) Because the multiple cannot be applied where the underlying profit metric is negative
These multiples divide a price or enterprise value by a profit metric — earnings, EBITDA or EBIT. They cannot be applied if the underlying profit metric is negative, because a negative denominator produces a figure that is not merely wrong but meaningless.
A related problem the workbook flags: where earnings are much lower than their long-term potential — a company just past a loss-making phase, or in a cyclical trough — the multiples would be too high to be meaningful even when technically positive.
That is precisely where Price to Book Value earns its place. It focuses on how much an investor needs to invest to gain a claim on the assets, and the book value stays positive even when the current year's profit does not.
One further caution from the workbook: compare against the industry average and the median, since a single extreme comparable can distort the mean.
Where this is taught
- Series XIX-D · Chapter 11: Valuationintroduced here
- Series XV · Chapter 3: Terminology in Equity and Debt Marketsintroduced here
- Series X-A · Chapter 8: Investing in Stocksintroduced here
- Series XIX-A · Chapter 11: Valuationintroduced here
- Series XIX-C · Chapter 14: Valuationintroduced here
- Series XV · Chapter 10: Valuation Principles
Related terms
- Discounted Cash FlowA valuation method that estimates the cash a business will generate in future years and converts each year back to what it is worth today.
- EBITDAProfit from running the business, measured before interest, tax, depreciation and amortisation — so before how the company is funded and how it accounts for its assets.
- Free Cash Flow to EquityThe cash left for shareholders after operating costs, tax, capital expenditure, working capital needs and all payments to lenders — what could be paid out as dividend without harming the business.
- Price to Book ValueShare price divided by book value per share — how many times the accounting net worth of a company the market is willing to pay.
- IPEV GuidelinesThe international best-practice guidelines for valuing unlisted private equity and venture capital investments at fair value, setting out seven widely used methods for valuing a portfolio company.