What is enterprise value?
The total cost to acquire a business: market cap plus debt minus cash. Unlike market cap, EV accounts for the capital structure. A debt-laden company costs more to acquire than its equity value alone suggests; a cash-rich company costs less.
Enterprise value (EV) = market capitalisation + total debt − cash and equivalents. The intuition: when an acquirer buys a company, they buy the equity AND assume the debt (a cost) AND get the cash (a refund). The net cost of the acquisition is EV. For valuation multiples, EV is the standard denominator instead of market cap because it normalises across companies with different leverage. EV/EBITDA, EV/Sales, and EV/FCF are the standard cross-company comparison ratios.
Why EV matters more than market cap
A pure equity P/E ratio compares share prices across companies but ignores leverage. A company with $10B market cap and $30B debt is, in acquisition terms, roughly equivalent to a company with $40B market cap and no debt. Their equity-only P/E ratios will differ dramatically; their EV/EBITDA ratios will be much more comparable.
Berkshire Hathaway, by virtue of carrying net cash on the balance sheet, has an EV materially below its market cap. This is the opposite of most companies and a feature, not a bug, of conservative capital allocation.
How invest-like uses it
EV/EBITDA and EV/FCF appear inside the Buffett-Fit valuation pillar, the Greenblatt Magic Formula framework, and the Smith framework. EV-based multiples are more apples-to-apples for cross-company comparison than equity-only multiples.
Frequently asked questions
What is enterprise value?
Market cap plus total debt minus cash. The total cost to acquire a business.
Why use EV instead of market cap?
EV accounts for leverage and cash. A debt-laden company's market cap understates the acquisition cost; a cash-rich company's market cap overstates it.
Where does invest-like surface EV?
EV/EBITDA and EV/FCF appear inside the Buffett-Fit valuation pillar, Greenblatt Magic Formula, and Smith framework.
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