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.

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.

Most Popular

Best savings accounts – February 2023
Savings

Best savings accounts – February 2023

Interest rates on cash savings are making a comeback. We look at the best savings accounts on the market now
3 Feb 2023
When will interest rates go up?
UK Economy

When will interest rates go up?

Interest rates are now at 4%, and they could rise further in the months ahead.
3 Feb 2023
NS&I brings back one-year fixed bonds with highest rates since 2010
Personal finance

NS&I brings back one-year fixed bonds with highest rates since 2010

NS&I’s one-year fixed bonds are back on sale after being pulled off the market in 2019 - but is the rate any good?
1 Feb 2023