Enterprise value

This measure’s the total value of a business by combining the market value of equity and net debt as an estimate of what a predator would pay for it.

Suppose a firm has issued 100,000 shares currently priced at £2.50, has borrowed £75,000 in short and long-term bank loans and has cash of £25,000. The enterprise value is the firm’s market capitalisation of £250,000 (100,000 x £2.50) plus net debt of £50,000 (loans of £75,000 minus cash of £25,000), so £300,000 in total.

The cash balance is deducted because a bidder could simply use this to pay down debt – in the same way if you were buying a house, priced by the vendor at £100,000 with £5,000 cash sitting in a chest in the front room, you and your mortgage lender would value the house at £95,000 since there is little point in borrowing another £5,000 to buy the chest full of cash.

• See Tim Bennett’s video tutorial: Beginner’s guide to investing: enterprise value.

Merryn

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