The Enterprise Value, or EV for short, is a measure of a company's total value, often used as a more comprehensive and realistic alternative to equity market capitalization. Since market capitalization does not include the debt component and cash reserves. Enterprise value is calculated as the equity market capitalization plus debt and value of preferred shares, minus total cash and cash equivalents.
EV = market value of equity + market value of preferred equity + market value of debt - cash and investments.
Enterprise value (EV) can be thought of as the theoretical takeover price if a company were to be bought. EV differs significantly from equity market capitalization and is a more accurate measure of a firm’s value since it also includes the debt value which a buyer inherits and is liable to pay. Also the cash and cash equivalent reserves which the firm has is deducted since the same is readily realisable.
Enterprise value to EBITDA
EBITDA represents the operational earning capacity of a firm. EBIDTA is earnings before interest, tax, depreciation, and amortization. Dividing a company's enterprise value by EBITDA ie (EV/EBIDTA) is frequently used in place of the price-to-earnings ratio (P/E). It's an especially useful ratio when comparing debt-heavy companies in capital-intensive industries.