Overview

The Enterprise Value in its most basic form is simply the market capitalisation plus the net debt. You will most likely find this simplistic approach across data providers such as Bloomberg.

Formula

EV = Equity + Debt - Cash

Three critically important points to note:

1. It is often helpful to include the pension deficit as part of net debt.
2. Where the year-end net debt has been massaged down, for example by the selection of a favourable year-end, or by window dressing in the year-end balance sheet, use the average net debt as a substitute for the year-end net debt and project forward on the same basis.
3. Enterprise value should be adjusted with other components such as prefered stock, minority interest, unfunded pensions, capital leases, associates, provisions, etc.

Corporate Finance / Valuation Theory

Enterprise Value (EV) is the value of operations of a firm i.e. the core business that generates operating income. From a valuation standpoint, EV is the sum of all net operating assets or the result of a DCF valuation or firm-based multiple comparable valuation. From a pricing perspective, EV is the sum of market capitalization (Equity Value) and net debt (Debt less cash). The business that the RV number refers to generates operating incomes (EBIT if there is no other income) and free cash flow to the firm (FCFF).

Mixing Enterprise Value and Equity Value

This one of the most common and also most egregious mistakes. Always compare pre-interest items to enterprise value, and post-interest items to equity value. This done because anything before interest is value to both debt and equity holders. Below interest expenses the debt holders have been paid and all else is equity value. Thus, Revenues, EBIT, EBITDA all compare to enterprise value, while net income compares to equity value.

Appropriates Multiples