Enterprise value is a powerful tool in equity valuation, both in discounted cash flow and related techniques such as residual income as well as valuation multiples. It produces more comparable metrics that are less impacted by differences in leverage and non-operating investments and better deals with dilutive instruments such as options.
However, EV is also easy to get wrong. Follow this guide to ensure that enterprise value is complete and consistent with the profit and cash flow metrics used in DCF and to produce EV multiples.
To read more about common mistakes in calculating EV see our article Enterprise value – calculation and mis-calculation.
Total enterprise value
Total enterprise value is the sum of all financing related claims on the business
Operating enterprise value
Operating (sometimes referred to as ‘core’) enterprise value is total EV less investments and other non-operating assets that are best dealt with separately in equity analysis.
Enterprise value multiples
Enterprise value multiples are best calculated using the operating EV. This may be combined with any consistently calculated measure of profit, cash flow or assets