Calculating the Enterprise Value of a Company Using Financial Statements

Nickolas C. Papanikolaou

Updated June 15, 2024

Abstract: Enterprise Value (EV) is a comprehensive measure of a company's total value, often used as an alternative to straightforward market capitalization. EV provides a more complete picture by considering the company's debt and cash levels. Here’s a step-by-step guide to calculating EV using financial statements.

Step 1: Gather Financial Statements

To begin, obtain the company’s most recent financial statements: the balance sheet, income statement, and cash flow statement. These documents are typically available in the company’s annual report.

Step 2: Determine Market Capitalization

Market capitalization, or market cap, represents the total market value of a company’s outstanding shares. It is calculated as: Market?Capitalization=Current?Stock?Price×Total?Number?of?Outstanding?Shares

For instance, if a company has 10 million shares outstanding and the current stock price is €50, the market cap is: €50×10,000,000=€500,000,000€

Citation: Market capitalization is the total market value of a company's outstanding shares of stock. It is calculated by multiplying the stock price by the total number of shares outstanding.

Step 3: Calculate Total Debt

Total debt includes all of a company’s short-term and long-term liabilities that bear interest. This information can be found on the balance sheet under current liabilities and long-term liabilities.

For example, if the balance sheet shows €150 million in long-term debt and €50 million in short-term debt, the total debt is: €150,000,000+€50,000,000=€200,000,000€

Citation: Total debt includes all short-term and long-term liabilities recorded on the balance sheet.

Step 4: Calculate Cash and Cash Equivalents

Cash and cash equivalents refer to the company's most liquid assets, such as cash on hand, bank balances, and marketable securities. This figure is found in the current assets section of the balance sheet.

For instance, if the balance sheet shows €70 million in cash and equivalents, this amount is used directly in the EV calculation.

Citation: Cash and cash equivalents are assets that are cash or can be converted into cash immediately.

Step 5: Include Non-Controlling Interest and Preferred Equity (if applicable)

• Non-Controlling Interest: This is the equity in a subsidiary not owned by the parent company. It appears in the equity section of the balance sheet.
• Preferred Equity: This represents the value of preferred shares, which also appear in the equity section of the balance sheet.

If the company has €30 million in non-controlling interest and €20 million in preferred equity, these figures are added to the calculation.

Citations:

• Non-controlling interest represents the equity in a subsidiary not owned by the parent company.
• Preferred equity is a class of ownership in a corporation that has a higher claim on its assets and earnings than common stock.

Step 6: Calculate Enterprise Value

Finally, combine these components using the EV formula:

Market?Capitalization+Total?Debt?Cash?and?Cash?Equivalents+Non-Controlling?Interest+Preferred?Equity

Example Calculation

Let’s summarize with an example:

• Market Capitalization: €500 million
• Total Debt: €200 million
• Cash and Cash Equivalents: €70 million
• Non-Controlling Interest: €30 million
• Preferred Equity: €20 million

Using the EV formula:

EV=€500?million+€200?million?€70?million+€30?million+€20?million=€680?million

Thus, the enterprise value of the company is €680 million.

Conclusion

Calculating the enterprise value provides a more nuanced view of a company’s worth, taking into account debt and cash positions along with market capitalization. By following the outlined steps and using the financial statements, investors and analysts can derive a more accurate measure of a company's total value.

References

1. Investopedia. "Market Capitalization".
2. Corporate Finance Institute. "Total Debt".
3. Investopedia. "Cash and Cash Equivalents".
4. Investopedia. "Non-Controlling Interest".
5. Investopedia. "Preferred Stock". ?