When you’re delving into the world of investing, there are many considerations that must be made by the so-called ‘left-brain’ — otherwise referred to as the numerical side of your cranium.
Calculating a company’s enterprise value is one of the most important left-brain decisions you can make.
But what is enterprise value?
Enterprise value (EV) is a way to measure a company’s total value. This is different to its market cap, which is the total value of all its outstanding shares.
To calculate enterprise value, you take a company’s market cap, add its outstanding debt, and subtract any cash it has on hand.
Enterprise Value = Market Cap + Debt – Cash
But why is enterprise value important? Because it helps investors to know the accurate value of the company and determine whether it is undervalued or not.
Let’s say that you want to buy/invest in a company, which means you’re also buying its accounts, which is all of its cash and all of its debt. Enterprise value takes these considerations into account to give you a more accurate representation of the true value of the company.
For example, if you were to buy a restaurant that was valued at $1 million, you’d also like to know how much debt it was carrying, right? Otherwise, you risk unknowingly taking on copious amounts of debt. See our video below for a great example from MyWallSt Chief Investor Emmet Savage.
Conversely, it also gives you an idea of how much cash and assets the company keeps on hand. It really is the company’s true value.
For a promo of MyWallSt Academy service and what you can learn, check out the video below.
Content Manager at MyWallSt
Jamie is the Content Editor here at MyWallSt. His favorite stock is Apple, which is also the first stock he ever bought. Jamie is not only a big fan of its products, but he believes that the tech giant has a whole lot more to give the world, and hasn't even scraped the surface of its potential.