- 1Enterprise Value = Market Cap + Total Debt - Cash & Equivalents
- 2EV represents the full "takeover price" of a company
- 3EV-based ratios (EV/EBITDA, EV/Sales) are capital-structure neutral
- 4EV is more useful than market cap for comparing companies with different debt levels
- 5Preferred by M&A professionals, investment bankers, and value investors
#What Is Enterprise Value?
Enterprise value (EV) answers: how much would it cost to buy the entire business?
EV = Market Cap + Total Debt + Preferred Stock + Minority Interest - Cash & Equivalents
Simplified: EV = Market Cap + Net Debt
If a company has a $50B market cap, $20B in debt, and $5B in cash, EV = $65B. You'd need $50B for the shares, you'd assume $20B in debt, but you'd get $5B in cash back.
#Why EV Beats Market Cap
Market cap only values the equity. Two companies can have identical market caps but very different enterprise values:
| Metric | Company A | Company B |
|---|---|---|
| Market Cap | $10B | $10B |
| Debt | $0 | $8B |
| Cash | $2B | $1B |
| Enterprise Value | $8B | $17B |
Company B's business is actually much more expensive despite the same market cap. EV captures this.
#Key EV-Based Ratios
EV/EBITDA
The most widely used EV ratio. Compares the total cost of the business to its operating cash flow.
| EV/EBITDA | Interpretation |
|---|---|
| < 8x | Potentially cheap |
| 8–12x | Fair value for most sectors |
| 12–20x | Growth premium |
| > 20x | Expensive or high-growth |
EV/Sales (EV/Revenue)
Like P/S but uses enterprise value. Better for comparing companies with different capital structures.
EV/FCF
Enterprise value divided by free cash flow. Shows how many years of cash flow it would take to buy the business.
#When to Use EV vs. Market Cap
| Use Case | Use EV | Use Market Cap |
|---|---|---|
| Comparing companies with different debt | ✅ | ❌ |
| M&A valuation | ✅ | ❌ |
| Industry-standard multiples | ✅ | Depends |
| Quick reference/screening | ❌ | ✅ |
| Equity returns analysis | ❌ | ✅ |
| P/E ratio | ❌ | ✅ (equity metric) |
#Limitations of EV
1. Debt Timing
EV uses the most recent balance sheet. Debt may have changed significantly since the last filing.
2. Off-Balance-Sheet Liabilities
Operating leases, pension obligations, and legal liabilities may not be captured.
3. Cash Quality
Not all cash is "free." Some may be trapped overseas (less of an issue post-2017 tax reform) or needed for operations.
#How We Use Value Metrics
In our factor model, the Value factor uses earnings yield and cash flow yield — which are essentially EV-based concepts. We look at how cheaply you can buy a company's earnings and cash flows relative to its full enterprise value.
Last updated: February 5, 2026