Enterprise value represents the total value of a business, including equity value plus net debt, providing a complete picture of what it would cost to acquire the entire business.
Enterprise value adds the market value of equity, total debt, and other debt-like obligations, then subtracts cash and cash equivalents. It represents the value of the entire business to all capital providers, not just shareholders.
EV answers: what would it cost to buy this entire business, including taking on its debt but getting its cash? Two businesses with the same equity value can have very different enterprise values based on their debt and cash positions.
A business has equity worth ₹100 crore based on its share price. It has ₹30 crore of debt and ₹10 crore of cash. Enterprise value is ₹100 + ₹30 − ₹10 = ₹120 crore. A buyer would need ₹100 crore for equity plus ₹30 crore to repay debt, but receives ₹10 crore of cash.
Market capitalisation: 10 million shares at ₹100 per share equals ₹100 crore. Total debt: ₹25 crore term loans plus ₹5 crore working capital facilities equals ₹30 crore. Cash: ₹10 crore. EV: ₹100 + ₹30 − ₹10 = ₹120 crore.
EV is used to compare businesses with different capital structures. The EV/EBITDA multiple is popular because it compares enterprise value to operating earnings, removing the effect of financing decisions.
When evaluating a business for acquisition, investment or sale, understanding EV and its components clarifies the true cost or value. Equity value alone can be misleading when debt and cash differ significantly.