Calculate the Enterprise Value (EV) of a company to measure the total value of a company.
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There are many ways to expand a business. One of them involves taking over available companies in the market. Enterprise value is a popular method for valuing the companies for potential takeovers.
Enterprise value is a metric that is used to value a company as a whole rather than just focusing on its current market capitalization. This shows a real value that gives a clearer picture of a company's worth to investors.
When companies decide to take over or acquire another company it becomes the owner of its current and noncurrent assets along with its debt liabilities too. So all short or long-term interest and debt payments due in the future will affect to the cost of acquisition to the acquirer.
Along with the debt and interest payments the acquirer will also become the owner of all the cash balance left on the balance sheets. This cash can be used to pay off debts, hence subtracted from the calculation to obtain the real value of the company.
The enterprise value metric provides you with a theoretical takeover price and can be discussed between the buyer and the seller at the time of negotiations. Enterprise value is accepted widely as a more accurate representation of the real value of the company than market capitalization.
Enterprise Value includes total debt, but it is difficult to obtain the market value of debt as most of it is in the form of bank financing, leases, etc. for which there is no market price. So, deriving market value of debt from the financial statements presents challenges.
To elaborate further on debt calculation, even if you can get the market value it is also important to know how the debt is being utilized in the company. For example, some large industries' debt can be used to promote growth. Enterprise value metric on the other hand fails to identify the usage component of debt.
Furthermore, the components this metric takes into account cash balances, debt level, and share prices are not always updated to financial records frequently. Generally, they are added once a year. This makes valuing of a company in the middle of the year difficult and underlines the importance of considering those metrics when reviewing the books.
The Enterprise value calculator by iCalculator has been created to save investors from the hassles of tiresome calculations. The calculator uses the following formula:
This is how you can take advantage of the Enterprise value calculator.
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