Enterprise Valuation is the methodology of reflecting company’s market value. Valuation of Enterprises includes market capitalization, short term and long term debt and any cash appearing in Company’s balance sheet.

It theoretically represents the potential value in case of acquisition of such an enterprise and significantly it is considered as more accurate than that of market capitalization value as it is derived from considering various other aspects too.

FORMULA FOR CALCULATING VALUE OF AN ENTERPRISE

Major Components

1. Market Capitalization

   Market Capitalization is derived from multiplying the total number of shares of the company by the current market value per share.

2. Debt

   Debt comprises of both short term debt and long term debt. Debt plays a significant role while acquiring business as it is quite obvious that while you are acquiring business of the company you are also acquiring its debt.

3. Cash & Cash Equivalents

   Cash and Cash Equivalents of the target company is also critical for deriving Enterprise Value as it reduces the value of enterprise.

Enterprise Valuation is oftenly used for calculating market value ratios such as Profit Earning Ratio (P/E Ratio) and for demonstrating the comparable analysis such as EV/EBITDA, EV/Sales etc.