Enterprise value (EV) is a financial metric used to evaluate the value of a company.
It is a comprehensive measure that considers a company’s debt, cash, and other assets.
This measure makes it a valuable tool for evaluating a company’s value, providing a more accurate picture of its financial health and potential for future growth.
There are several reasons why one should use enterprise value as a valuation method:
It includes debt: When valuing a company, it is essential to consider its debt levels, as this can impact its financial stability and future growth potential.
Enterprise value includes short-term and long-term debt, giving a complete picture of a company’s financial obligations.
It includes cash: Enterprise value also provides money and other liquid assets, which makes it possible to pay down debt or invest in growth opportunities.
It is crucial because a company with much cash indicates more financially stable and potentially more valuable.
It is a comprehensive measure: Enterprise value considers a company’s debt, cash, and other assets, providing a broader view of a company’s value than other valuation methods that focus solely on equity.
It helps compare companies: Enterprise value can help compare companies in the same industry or sector, allowing for a more apples-to-apples comparison.
This is because enterprise value considers differences in debt levels, cash balances, and other assets, making it easier to compare companies on a level playing field.
Overall, enterprise value is a valuable tool for evaluating the value of a company.
Taking into account a company’s debt, cash, and other assets provides a more accurate and comprehensive view of a company’s financial health and potential for future growth.
Author, Rune Holsvik
