Ten Stock Analysis Ratios Used By The Pros: Enterprise Value (EV)

Ninth Key Ratio :

Enterprise Value (EV)

The enterprise value of a business is considered a more effective method of valuing a business than the standard market capitalisation of shares outstanding in the case of an acquisition. Enterprise value is effectively what a buyer would get if a company was to be bought. Debt, cash, preferred shares and minority interest are used in the calculation of the enterprise value as they would have an impact on what potential acquirer would end up with. When a company is bought, the acquirer will receive the cash and have to pay off the debt. Although preferred shares are equity, they have similar attributes to debt in as far as preferred shares’ dividends are fixed and are ranked above common equity. Minority interest accounts for any of the business that is owned by another company and will not be received by the acquirer of the business.

Formula:

Market Capitalization

+

Debt

+

Preffered Share Capital

+

Minority Interest

__

Cash

 

Enterprise Value = Market Capitalization + Debt + Preferred Share Capital + Minority Interest – Cash

EPS = Net Income/Number of Share Outstanding

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