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.

MoneyWeek magazine

Latest issue:

Magazine cover
Walking out on the banks

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 3 FREE Issues
Shale gas 'fracking' promises to transform Britain's energy market. Find out what it is, what it means, and how to invest.

More from MoneyWeek

The problem with the Bank of England

Fracking: Nine reasons not to get carried away

Five small-cap stocks worth a flutter

This Dutch company could help us tame floods

ScreenHunter_01 Mar. 25 09.51

Get the latest tips and investment opportunities from MoneyWeek magazine: Claim 3 FREE Issues HERE