Introduction To Enterprise Value
enterprise value is a measure used to value a company. it is usually used as a more comprehensive alternative to market capitalization. the enterprise value of a business could be calculated by taking market capitalization, adding total debt including long and short term debt and subtracting all cash and cash equivalents. the result shows how much money will be needed to buy the whole company. albert's flooring wants to buy ed's carpets. ed's is currently trading at $10 per share and has 100,000 shares outstanding. to buy all of the shares, albert's will have to pay $1,000,000, the market capitalization of ed's carpets, but that's not all there is to it. if albert's flooring purchases ed's carpets, albert's also has to take on ed's debts. this increases the total price of purchase. cash and cash equivalents have the opposite effect. if ed's has extra cash, albert's can take all of the available cash and use it to pay down debts. this effectively reduces the price albert's has to pay for ed's carpets. so, if ed's has $1,000,000 in debt and $500,000 in cash, the enterprise value would be the market cap, $1,000,000, plus $1,000,000 in total debt, minus $500,000 in cash, equaling $1,500,000. this is the enterprise value that albert's flooring will consider before buying ed's carpets. investors often use enterprise value, because it provides a clearer picture of the real value of a company as opposed to simply considering the market capitalization. enterprise value is also an important component in many ratios that investors can use to compare companies.
- enterprise value・・・企業価値→https://ja.wikipedia.org/wiki/%E4%BC%81%E6%A5%AD%E4%BE%A1%E5%80%A4
- cash equivalent・・・現金同等物
- pay down debt・・・負債を返済する